A Dozen Lessons I Learned from Bill Gates Sr.


Bill Gates Sr. is one of three mentors I have had that were actually appointed by a group to help me develop as a person. I have had other mentors that I recruited or the relationship just developed. What Bill taught me was not only important but inevitably delivered at just the time I needed the guidance most. Other than my parents, who attended college with Bill and his first wife Mary, no one has had more influence on who I am. I probably never go through a day where I do not think subconsciously at least once: “What Would Bill Gates Sr., do in this situation?” Having Bill Gates Sr. be your mentor is the equivalent of being able to start a career and life at third base. Bloody hell was I lucky. Set out below are a dozen of the many things he taught me.

  1. “I am an optimist.” He is always optimistic and forward thinking. The only time I ever saw him less that fully optimistic was at a lunch right after his wife Mary died. That day at the restaurant he said emphatically as tears poured down his cheeks: “I will never marry again,” which goes to show that he is not always right since he married Mimi Gardner Neill about a year later.
  1. “There’s power in sharing stories.” The holiday card Bill sends each year and the corny poems he traditionally recites at events are all about storytelling. Bill also uses stories when talking to clients to who looked to him for wisdom as much as they did legal advice.  This reminds me of the great story about his son who said after being chided about being slow getting into the car for a family event: “I’m thinking, mother. Don’t you ever think?” Bill once recalled that day in this way: “Imagine yourself in our place. I was in the most demanding years of my law practice. I was a dad, a husband, doing all the things parents in families do. My wife, Mary, was raising three kids, volunteering for the United Way, and doing a million other things. And your child asks you if you ever take time to think.” 
  1. “A start-up business is just virtually 100 percent devotion both in time and energy.” Together with a few other people Bill built both a fine law firm and a solid business. Like most businesses the law firm was not a Microsoft class grand slam financial outcome, but it was a fantastic result nevertheless. The vast majority of businesses are more like the law firm Bill created than Microsoft, Facebook or Google. 
  1. “As conflicts arise between parents and children from common causes, the whole business of exerting independence, fighting against discipline, that’s an experience we had, and it was one that was particularly the case with my son and his mother for a period of a couple of years. It obviously worked itself out at a very early date. An interesting piece of that was the consultant that we went to and talked to about this. Mary and I would go in, and our son would go in and talk to this fellow. This went on for a better part of a year and a half. Toward the end, Mary and I were there for a meeting with him, and he said, ‘You have this war going on with your son — you really should understand that he’s gonna win.'”  Pick your battles and especially your wars.


  1. “Woody Allen said, ‘Eighty percent of success is showing up.’ And, I believe that.  If you’re on a board, a committee of some kind, and you go to a meeting and nobody else showed up… You support causes by showing up and, obviously, participating.”  It is stunning how many boards, committees and groups Bill has participated in over his career. His influence is everywhere you look in Seattle and, if you look at the influence of the Bill and Melinda Gates Foundation, the world.  As just one illustrative example, in the early 1980s he involved me in an effort to move technology from the University of Washington to the private sector. The Washington Research Foundation was organized in 1981 and the Washington Technology Center two years later to foster the transfer of technology from university researchers to commercial businesses. He knew then that it is the positive spillovers a great research university that drives the economic and cultural vibrancy of a city. Having the opportunity to watch him operate in that setting was life changing in terms of developing my skills.
  1. “I believe in the combined power of men and women who ‘show up’ for the people they love and the causes they believe in.” The whole of people’s participation in a cause is worth more than the sum of the parts when it comes to “showing up.” Bill believes that everyone who has been fortunate in life needs to do something to counteract what he calls the “disadvantages that random chance has imposed on others.”
  1. “Society works better when people think less about ‘me and mine’ and more about ‘us and ours’.” “We’re all in this together.” Making this point is best done by looking at two examples. The first example concerns the United Way campaign which is always an important activity in the life of Bill Gates. He understands the power of people helping others in a community. His enthusiasm causes other people to become involved and that snowballs. The second example involves an after work basketball team that I played on with Bill. He played center and I was a guard on that team since I am a full foot shorter than he is  (which is why I always wanted to be like him when I “grew” up). He was an unselfish player more concerned with making a great pass than scoring himself. On this team and in other settings he was always thinking about “us and ours” and not “me and mine.”
  1. “I’ve seen the power of public will to take on and surmount great challenges.” “I don’t care if you carry a banner or if you stand near the back. You can yell into a microphone if you like or you can listen carefully if that’s your style. You don’t need a soapbox to be a good citizen, you just need to be part of the public will to make life on this planet a little better.” How can you say it better than that? When Bill turned 90 years young in 2015 his birthday party held at the University of Washington was attended by many luminaries. Over the course of his career he helped many people and numerous stories were told at that event about his positive impact on their lives. A book of memories was produced for that event in his honor.  In one memorable chapter in that book Howard Schultz wrote that without Bill’s help in dealing with an unscrupulous character he would not have been able to buy Starbucks. If Seattle has a George Bailey equivalent (a lead character in the movie “It’s a Wonderful Life”) it would be Bill Gates Sr.
  1. “I’ve experienced the fear of being poor, the exhilaration of working hard to build a career.” “Dad was very hard-working – he had a partnership in a furniture store, worked very hard, worked long hours. And I learned from seeing that.” “My parents never talked about showing up. They just did it.” There wasn’t a lot of structure to my growing up. I had an awful lot of discretion about where I went, what I did, who I did it with.” The way children are organized today by parents is quite different than what Bill experienced. One thing this upbringing did was force him to learn from mistakes since he had lots of chances to make them. I can’t help think that this experience is a significant part of why Bill has such sound judgment. Bill was on the board of directors of Costco with Charlie Munger who is an advocate of learning from mistakes. Charlie said once: “We look like people who have found a trick. It’s not brilliance. It’s just avoiding stupidity.” Bill contributed to my personal development in many ways not the least of which was the idea of sound judgment. “Ready, aim fire” not “Ready, fire, aim.”
  1. “Hard work, getting along, honoring a confidence and speaking out.” These are the attributes I saw in him as a business leader and community volunteer. He polished each attribute that he learned as a boy scout under scoutmaster Dorm Brahman. He did not forget those lessons. I remember once seeing him tie a fancy knot on a speedboat at his home on Hood Canal (you can take a boy out of scouting, but not take scouting out of the boy).
  1. “You should never demean your child. When you think about the centrality of that, in terms of the relationship with an offspring, you’re off to a really good start.” The centrality of his family in everything Bill does is an inspiration.  The way the family operates as a team is also marvelous to watch.
  1. “For all the rewards of private life, my life would have been much the poorer if I had not experienced those moments when I felt like I belonged to something larger.” There is arguably no organization where he has had more impact that the University of Washington. And the reverse is also true. There is a biographical article about Bill entitled: “Mighty are those that wear the purple and the gold.” He is mighty indeed. Go Huskies!

Biography: Bill Gates Sr. earned his bachelor’s and law degrees from the University of Washington, following three years of military service. A founding partner at Shilder, McBroom, Gates and Baldwin, Gates has served as president of both the Seattle/King County Bar Association and the Washington State Bar Association. He has served as trustee, officer, and volunteer for more than two dozen Northwest organizations, including the Greater Seattle Chamber of Commerce and King County United Way. In 1995, he founded the Technology Alliance, a cooperative regional effort to expand technology-based employment in Washington. Gates also has been a strong advocate for education for many years, chairing the Seattle Public School Levy Campaign in 1971 and serving as a member of the University of Washington’s Board of Regents from 1997-2012.


Mighty are those that Wear the Purple and the Gold http://www.washington.edu/alumni/columns-magazine/june-2013/features/gates/

Showing Up for Life  https://www.amazon.com/Showing-Up-Life-Thoughts-Lifetime/dp/0385527020/ref=sr_1_1?ie=UTF8&qid=1495307985&sr=8-1&keywords=Bill+gates+sr

Whitman Commencement Speech http://www.networkworld.com/article/2279854/data-center/lessons-from-bill-gates–dad–whitman-college-commencement-speech.html

Showing Up http://www.law.washington.edu/Multimedia/2009/ShowingUp/Transcript.aspx

How would Ann Miura-Ko have reacted if Bill Gates had walked into her office in 1975?

Ann Miura-Ko is a Partner at the venture capital firm Floodgate. She is a lecturer in entrepreneurship at Stanford. Prior to co-founding Floodgate, she worked at Charles River Ventures and McKinsey and Company. Some of Miura-Ko’s investments include Lyft, Ayasdi, Xamarin, Refinery29, Chloe and Isabel, Maker Media, Wanelo, TaskRabbit, and Modcloth. She has a BS from Yale University (EE); and a PhD from Stanford University (Math Modeling of Computer Security.)

Since my post from last weekend was about Floodgate’s co-founder Mike Maples Jr., I decided to write about Miura-Ko’s ideas in the context of a specific early stage business I know something about (Microsoft in the 1970s and early 1980s). Miura-Ko’s ideas are, as usual, in bold text and my commentary follows. This post is different in that I am commenting on a specific hypothetical and how Miura Ko’s ideas and approaches might have been applied. This is an experiment and I may or may not do this again.

The thought experiment is as follows: Imagine you are Miura-Ko, had been sent back in a time machine and a 20-year old entrepreneur named Bill Gates walks into your office in 1975. Instead instead of bootstrapping Microsoft’s business like he did in real life, he is in this hypothetical seeking seed stage venture capital.

  1. “The priority as an early stage startup is at the bottom of the stack  —  What is the unique advantage or insight you are building your product on top of? The product/market fit will come later after your key insight of what your unique advantage is.”

The stack Miura-Ko is talking about in the bold text is a key part of the Floodgate investing process which starts at the bottom of this stack below and works up.

value stack

Miura-Ko is saying that at Floodgate the process starts with a careful look at strategy (i.e., whether business might be able to achieve a sustainable competitive advantage). Miura-Ko’s interest in “the unique advantage” of the entrepreneur is directly tied to the “proprietary power” of the business, which in essence is about creating sustainable competitive advantage. If everything that a business offers can be easily replicated by other businesses, then the entrepreneur’s business won’t be very profitable.

Let’s apply Miura-Ko’s process to the hypothetical. What were Bill Gates and Paul Allen thinking about when they formed Microsoft?

They had reached two important conclusions:

  1.  Computers would be owned by individuals; and
  2.  Software rather than hardware was the key to sustainable profit.

To make the investment Miura-Ko would have believed that software rather than hardware was going to be Microsoft’s “unique advantage.”

This focus on software seems obvious now but it was not obvious in the 1970s. I am not saying making hardware is never a good idea, useful to sell software or otherwise valuable but the fateful decision to focus on just software early in the life of the Microsoft business meant that the business was “capital light.” Microsoft never really needed to raise venture capital as a result and did so only once to convince Dave Marquardt of August Capital to join the board of directors. When Microsoft eventually went public years later Bill Gates alone owned nearly 50% of the outstanding shares because the business did not require a lot of externally provided capital to grow.  Microsoft went public when it did only because it had too many shareholders and SEC rules required that it do so.

Strategy is about deliberately deciding to be different and finding unique advantage. Here is Bill Gates describing his thought process in creating a strategy for Microsoft in 1975:

“The original insight for Microsoft was this: What if computing was free? The answer: Individuals would use computers as a tool, and software standards would become the critical element in making this happen.” Fortune, January 16, 1995

Paul and I

“When you have the microprocessor doubling in power every two years, in a sense you can think of computer power as almost free.  So you ask, Why be in the business of making something that’s almost free?  What is the scarce resource? What is it that limits being able to get value out of that infinite computing power?  Software.” Playboy, July 1994

This is from ~ 40 years later (June 2017):

40 years

The analysis by Gates that resulted in a focus on software was microeconomics linked to an observation about technology. That is was done by someone his age at that time is history was amazing.

  1. “If you are asking if you have product/market fit, you do not.”

A business that spends most of its time desperately trying to keep up with customer demand and has a scalable business model has found product/market fit. This is the part of the stack that Floodgate refers to as Layer 2 (Product Power).

The history of Microsoft again is an interesting example of product/market fit. It was in 1975 that the MITS Altair 8800 appeared on the cover of Popular Electronics and inspired Gates and Allen to develop a BASIC language for that device. In 1975 Microsoft revenues were only $16,005. Would that have been enough to get Miura-Ko to invest in Microsoft at seed stage? I think so. The bet she made on Lyft supports my conclusion. Here below is Miura-Ko on Lyft:

“I invested in Lyft when it was still a business called Zimride. I invested because they came in and told me a story about how transportation innovation was critical to significant inflection points in the economy and that they believed such an inflection point was on the horizon. (No other transportation startups existed back in 2010 when I invested aside from Zipcar.) They had a hard time raising their Series A as well. It wasn’t until they pivoted into Lyft in 2012 that they started getting proactive interest from investors.” “Zimride was originally a platform for carpooling and they sold this platform to individual Universities and companies. They were making sales but it wasn’t working as a scalable business model. They had customers but it never felt like product market fit. Lyft was just another experiment that the team tried. They were also looking at doing bus routes from SF to Tahoe, renting vans from SF to LA, etc. The thesis for Lyft was — mobile is big and doing ride sharing peer-to-peer (P2P) would be interesting. The big questions for Lyft before they launched was how big of an idea was this and how confident were they in trying this. Normally the founders had been very nice but when they pitched the idea of Lyft they were very intense about it and the board said to go for it and try it. During the first week of Lyft launching (Zimride was still going on) Tommy Leep who worked with us at Floodgate said — “You have no idea how big this is going to be.” He experienced this magical moment while using Lyft and became one of their early power users. ”

The decision about whether to invest in Microsoft would have been easier for Miura-Ko to make in 1978 when Microsoft’s year-end sales exceed $1.3 million. But a seed stage investor in 1995 wouldn’t have known that.

  1. “It’s the business model that matters. If you send me a 50 page business plan, I probably won’t read it. But send me a picture of your business model all the hypothesis that you have around your business model and I’ll take a really good look.”Alexander Osterwalder has a book on business model generation and so there are different frameworks now that exists out there where you can use them to figure out what your business model looks like.”

The third layer in the Value Stack is mostly about development of a solid business model, which is the way that a business turns innovation into value. Did Microsoft have a sound business model? In 1975 this business model question was tricky, because at the time piracy was rampant which caused Gates to write his famous “Letter to Computer Hobbyists” about software piracy. Gates solved this business model problem by licensing the software to hardware manufacturers who could mostly be counted upon not to violate intellectual property laws.  Gates describes his business model as follows (remember in this thought experiment he is 20 years old and this is 1975):


“It’s all about scale economics and market share.  When you’re shipping a million units of Windows software a month, you  can afford to spend $300 million a year improving it and still sell it at a low price.” Fortune, June 14, 1993

“We keep our prices low and innovate as fast as we possibly can because we are keenly aware of the large number of companies that are single-mindedly working to displace us in every software category.” Upside, April, 1995

  1. “We have our startups do is they’ll go through each component of a business model. In my mind those would be your users, your customers, your pricing which also includes your customer lifetime, how you do customer demand creation, your sales channel, and then on the backend if your producing something or if you have inventory your whole supply chain that could all your components, design, manufacturing, and inventory warehousing.” “How do the customers view you, what’s your value proposition to them? What’s your value proposition to the manufacturers? What’s your value proposition to the sales channel? How do you do demand creation? What’s the cost of customer acquisition? These are all questions that you should be constantly thinking about. And if the dollars in are not greater than the dollars out, then you need to rethink your business model right then and there.”

Gates might have said to Miura-Ko in her office that day what he would say later in an interview: “Our basic business strategy [is] to charge a price so low that microcomputer makers couldn’t do the software internally for that cheap. One of the bigger early contracts was Texas Instruments, where we bid $99,000 to provide programming languages for a home computer they were planning.” I believe Miura-Ko would have seen the potential of early Microsoft given her track record and investing style.

  1. “In the early stage, a good think to look at is — how good are they at early hiring? And what are they willing to give up to get the best people? One of the companies we invested in has successfully hired great talent at some of the top companies around Silicon Valley, even during this highly competitive market. The way they do this is the founders have spent a lot of time thinking about who they want to hire, how they do interviews, compensation structure, etc. They think about these issues just as much as they think about the product.” “If a company is advertising and posting job postings everywhere — this is a sign the company isn’t doing so well. There isn’t anyone who will advocate for your company like the people who are working there already.”

If you have been reading posts on this blog you have seen me write about the fact that missionaries more successful than mercenaries. There is even one post dedicated to just that issue. This matrix below illustrates why being a missionary can be 100% consistent with seeking high profitability.  The issues are separate.

Seeks high profitability No profit objective
Passionate re the product Missionary (Bill Gates at MSFT) Missionary (Bill Gates at the BMG Foundation)
Not passionate re the product Mercenary Volunteer (paying penance for some reason)

Founders who are not passionate about their mission fail way more often. Lots more. Employees and founders who follow their passion do better in their career. The passion and energy of gates and Allen caused many people to join Microsoft. Gates has several times lauded Steve Ballmer for his ability to hire great employees which allowed the company to scale. The team they built was essential to the company that was created. The more great people they hired, the more people wanted to work there.

  1. “We will only invest if there are thunder lizard ambitions but that has nothing to do with how much they raised upfront.”

There is no question though that the ambitions of Bill Gates were huge. This story from the book Hard Drive about Gates takes place right before he would have visited the office of Miura-Ko in my hypothetical.

“Gates had tried to prepare his parents for the fact that he might eventually drop out of Harvard to form a computer business with Allen. As Mary Gates saw it, her 19-year-old son was about to commit what amounted to academic suicide. …Mary Gates turned to a new friend, Samuel Stroum, an influential and respected business leader she had met during a United Way campaign, for help with her son. She arranged for Bill to talk with Stroum, in the hope that Stroum would convince her son to drop the idea of starting a company, at least for the time being, and continue his education at Harvard. A self-made multimillionaire, philanthropist, and civic leader, Samuel Stroum’s advice was often sought, even by the region’s most powerful movers and shakers… “I was clearly on a mission,” recalled Stroum of the couple hours he spent picking Gates’ brain. “He explained to me what he was doing, what he hoped to do. I had been involved in that industry since I was a young boy. He just talked about the things he was doing… Hell, anybody who was near electronics had to know it was exciting and a new era was emerging.” Gates talked about the vision he and Paul Allen shared. The personal computer revolution was just beginning, he told Stroum. Eventually, everyone would own a computer. Imagine the moneymaking possibilities…. a zillion machines all running on his software. Not only did Stroum not try to talk Gates out of his plans to start a business, but after listening to the enthusiastic teenager he encouraged Gates to do so. “Mary and I have kidded about it for years,” said Stroum, now 70. “I told her I made one terrible mistake—I didn’t give him a blank check to fill out the numbers. I’ve been known as an astute venture capitalist, but I sure didn’t read that one right.”

  1. “While you are an early stage startup it’s ok to incur technical debt. During this time period you really aren’t sure what is going to work and what isn’t going to work — the key should be emphasizing on moving fast and making quick decisions vs. making everything perfect.”

Miura-Ko is expressing a thought similar to Mark Zuckerberg’s idea that a business should “move fast and break things.” But in doing this Miura-Ko knows that some technical debt may be incurred and believes that this is acceptable. Ben Horowitz explained technical debt in his recent book The Hard Thing About Hard Things in this way:  

Thanks to Ward Cunningham, the metaphor ‘technical debt” is now a well-understood concept. While you may be able to borrow time by writing quick and dirty code, you will eventually have to pay it back — with interest. Often this trade-off makes sense, but you will run into serious trouble if you fail to keep the trade-off in the front of your mind.”

Almost every software company that is ambitious gets into a situation where there is some technical debt. When I asked a close friend for a good example of technical debt involving Microsoft he said:

“With MS-DOS Word huge effort was undertaken to port the code to serve the Mac (and then the Windows code base). The debt though was that the data structures were designed for very small amounts of real mode memory and floppy disk space which were not the right assumptions to make for Windows with paged memory and hard disks.”


  1.  “A lot of people get confused because we as a firm also talk a lot about Customer Development, the Lean Startup methodology. And they say, ‘Well how is that consistent with Lean Startups?’ The problem is people confuse lean with small. Lean has nothing to do with small. In fact the amount of capital that you’ve taken has nothing to do with whether or not your ambitions are big or small.  … Lean is not small. Lean is a tactic by which we help our entrepreneurs and the entrepreneurs help themselves in a data driven way figure out how they’re going to iterate their product.”

Bill Gates had to watch cash carefully since in the very early days there was a lot of uncertainty about revenue. When he meet with Miura-Ko in my hypothetical Microsoft would have had $16,005 in revenue and three employees. Gated would eventually go through a cash crisis when MITs stopped being a source of revenue. In an interview many years later the two Microsoft founders described the problem:

Gates: “It could get scary. In our very first contract with MITS, we set them up to sell our BASIC to their customers, rather than us selling to computer buyers directly. We thought it was a good deal because they agreed to make “best efforts” to sell it. But later they decided not to sell to anybody at all because there were so many illegal, free copies of our BASIC floating around, so why try to charge people for it? That really made us mad because we thought it encouraged piracy. We eventually went into arbitration to determine if they were in compliance with the contract. In the meantime we were totally out of money…

Allen: …because MITS was withholding payments from us while the arbitration was going on.

Gates: They were trying to starve us to death. We couldn’t even pay our lawyer. They tried to get us to settle, and we almost did, it was that bad. The arbitrator took nine months to issue his damn opinion. But when it was all over, the arbitrator ripped them apart for what they had done.

Allen: That case really, really scared us. If we had lost, we would have had to start over. Bill would call up his dad for advice. We were on pins and needles the whole time.

Gates: But, you know, through it all, we never borrowed money. I always felt like if we had to, we could have. But we never did.”

Gates would later write in his book The Road Ahead about the impact of that experience:

“After that episode, Microsoft has been perpetually cash flow positive. In fact, I developed a rule: We always have enough cash on hand to be able to run the company for at least a year if no one pays us. The MITS experience, suddenly having no income, made me very conservative, a trait that persists to this day.”

  1. “Nowadays people talk about pivoting as changing the homepage on your website and calling that a pivot. That’s not a pivot. A pivot is when you feel sick and you are going to throw up because what you are working on is such a dramatic shift and you don’t know if it will work or not.” “[As an example] the founders had this dilemma where Lyft was taking off but they still had Zimride going on at the same time. We went for a walk and they asked — what should we do with this other asset we have — should we move people over to Lyft? At the time this was a really difficult decision to make but we decided to move everyone onto Lyft. In hindsight this is a no-brainer decision but you need to understand the founders spent 3 years of their life selling the idea for Zimride, building Zimride, raising money for Zimride, having users for Zimride, and sacrificing weekends / friends / family to try to make this happen. Then you are faced with the realization that what you have been building this whole time isn’t working, but this thing you spent a month on is working. It takes a lot of courage to shut the thing down you have spent all of this time and energy on. I appreciate the courage it took for the founders to move aggressively into Lyft.”

Microsoft never did a pivot. So this is a hard one to put in this thought experiment.  While it was not a pivot, for Bill Gates and Paul Allen a prior business impacted what they would do later at Microsoft:

“While Traf-O-Data was technically a business failure, the understanding of microprocessors we absorbed was crucial to our future success. And the emulator I wrote to program it gave us a huge head start over anyone else writing code at the time. If it hadn’t been for our Traf-O-Data venture, and if it hadn’t been for all that time spent on UW computers, you could argue that Microsoft might not have happened.”

However this example did not involve the gut wrenching shift that Miura-Ko describes.

  1. “As an early-stage investor I’m not in the crazy fray of investing in companies once everyone recognizes the company is on a hockey stick trajectory. It’s my job to recognize the early signs of something interesting.”

I have already said that I believe Miura-Ko would have seen the potential of Microsoft in 1975 and would have made an investment if asked. But that was another time and place. Making early stage bets means a lot of investments will fail. It is easy to look back at a great success and say: “I would have invested in that.” To illustrate, someone who did not see the potential was an engineering student at the University of Washington who worked with Gates and Allen on their Traf-O-Data business had many conversations with Gates and Allen about PCs. He recalls: “The whole concept of having a big clunky PC in your house that just used up room, I thought that was totally dumb. I did not have any foresight into what was really going on. I just kinda fought it in my mind, and said, ‘Nah, this is not going to work.’”

  1. “We have invested in solo founders but the healthier dynamic is to have 2–3 co-founders. Being a solo founder is lonely and you are a prisoner to your own startup — that kind of dynamic can be really bad. Having 2–3 team members you feel much more social pressure to stay in the game and can focus the whole team on a problem, in general, teamwork is a more healthy dynamic. The other problem is there is no superhuman founder, everyone has their own weaknesses. It’s better to round out the edges of your weak spots.”

The early team at Microsoft was amazing. They all just fit together and created this positive feedback loop (lollapalooza) of success. The right people kept arriving at the company at just the right time year after year. When Miura Ko met Gates in this thought experiment there might have been just three Microsoft employees.

In addition to Gates and Allen these people worked at Microsoft in the very early days:

Steve Wood was a programmer who developed a version of FORTRAN for the 8080.

Bob Wallace was a programmer who developed a version of BASIC for Texas Instruments (TI).

Jim Lane was a programmer who was hired to write a DEC simulator for Intel’s new 16-bit chip, the 8086.

Bob O’Rear was a programmer who worked on a translator to turn the 8080 BASIC code into 8086 code.

Bob Greenberg was a programmer who worked on developing TI BASIC.

Marc McDonald was a programmer who worked on converting 8080 BASIC for the NCR machine.

Gordon Letwin was a programmer who developed a BASIC compiler.

Andrea Lewis was a technical writer. Marla Wood was a receptionist/secretary/bookkeeper

Many thousands of key people like Ballmer, Shirley, Gaudette and Maples Sr, would later join Microsoft just to name four. The problem I have about going further with names is that the list is long and if I leave someone out I will make that someone very unhappy. So I will stop at four. The important point is that these people balanced each other well and the whole was more than the sum of the parts.

  1. “Gutenberg was probably one of the first people who ever got venture capital so he had a business partner by the name of Faust and he went out and had this idea around the printing press and he got the equivalent of 5 years’ worth of peasants pay to get started on his business. His series B financing came about when he realized he needed a little bit more financing, so this time he asked for little bit more capital from the same guy and the guy gave him the equivalent of 10 peasants stone built houses. So he went along, made a few more mile stones and then had to go back for a series C financing. And then sure enough he was able to get that and it was the same amount; the amount that would basically pay for 10 stone houses for a peasant. And it turns out that the story ends very sadly. He wasn’t really able to satisfy his investors. His investors as you may have heard from other stories from entrepreneurs an investor gets very anxious, wants to see more milestones, he isn’t sure why this isn’t proceeding and eventually sues and he wins and he’s able to buyout Gutenberg’s portion of the printing store. Gutenberg actually died a relatively penniless man and most people don’t really realize his contributions to the printing press until much, much later. And the history books are then changed to reflect his contributions. Now my story today about investors and entrepreneurs is totally different. I believe actually that this whole relationship between innovators and investors is actually very much switched. The power has shifted to the entrepreneur.”

This is excellent story-telling by Miura-Ko which makes an important point: great founders are what creates Thunder Lizard businesses. Gutenberg was a great founder who did not have a great financial result.  But he did change the world in a very significant way. Capitalism requires failure since that is what drives a better life for society as a whole. The cities that produce that most successful startups and the most innovation do not treat failure as a stigma. Firms like Floodgate and investor like Miura Ko help make that happen. But it is the founders that matter most.


Miura-Ko: http://ecorner.stanford.edu/videos/2540/Funding-Thunder-Lizard-Entrepreneurs-Entire-Talk

Miura-Ko: https://medium.com/cs183c-blitzscaling-class-collection/class-4-notes-essay-reid-hoffman-john-lilly-chris-yeh-and-allen-blue-s-cs183c-technology-428defb04850

Miura-Ko: https://medium.com/cs183c-blitzscaling-class-collection/cs183c-session-4-ann-miura-ko-98617f03b580

Miura-Ko: https://techcrunch.com/2016/07/06/floodgates-ann-miura-ko-on-the-four-powers-all-venture-backed-startups-share/

Miura-Ko: https://www.geekwire.com/2017/true-seattle-tech-engineers-loyal-san-francisco-indeed-data-confirms/

Allen and Gates:   https://www.geekwire.com/2017/bill-gates-paul-allen-business-microsoft-engineer-partner/

Fortune interview: http://archive.fortune.com/magazines/fortune/fortune_archive/1995/10/02/206528/index.htm

Gates Smithsonian Oral History: http://americanhistory.si.edu/comphist/gates.htm

Ben Horowitz (The Hard Things About Hard Things): https://www.amazon.com/Hard-Thing-About-Things-Building/dp/0062273205

The Road Ahead: https://www.amazon.com/Road-Ahead-Bill-Gates/dp/0453009212/ref=sr_1_2?s=books&ie=UTF8&qid=1497272499&sr=1-2&keywords=the+road+ahead

A Dozen Lessons about Business and Investing I’ve Learned from Mike Maples Jr.


Mike Maples, Jr. is a Partner at Floodgate. Before becoming a full-time investor, Mike was involved as a founder and operating executive at back-to-back startup IPOs, including Tivoli Systems (IPO TIVS, acquired by IBM) and Motive (IPO MOTV, acquired by Alcatel-Lucent.) Some of Maples’ investments include Twitter, Twitch.tv, ngmoco, Weebly, Chegg, Bazaarvoice, Spiceworks, Okta, and Demandforce. This is the first time I have written about the son of someone else I previously profiled on this blog. Maples has an M.B.A. from Harvard Business School and a Bachelor’s degree in Industrial Engineering and BS degree from Stanford University. Next weekend I will profile the co-founder of Floodgate, Ann Miura-Ko. Floodgate is an early stage venture capital firm that wants to invest and assist “the iconic companies with the biggest impact. Floodgate backs these Prime Movers before the rest of the world believes.”


  1. “Floodgate uses a framework called the “value stack” [which is] a hierarchy of powers. Each is powerful on its own, but as these advantages are layered on top of each other they reinforce and amplify each other even further.” “We are proud to have been one of the tiny number of firms to have invented the micro-VC space over a decade ago. Back when we got started in 2005, it was very hard for a founder to raise $1M. They had to raise a whole lot less or be de-risked enough to raise $5M from a traditional VC.”

If you have read the work of Michael Mauboussin you have seen him make this point repeatedly: “elite performers in all probabilistic fields all think in terms of process versus outcome. So while our society may be conditioned to focus on outcomes, an emphasis on process makes the most sense for the long haul.” Maples has thought deeply about Floodgate’s investing process and can articulate a clear investing thesis. Floodgate believes that the right “stack” (the co-founders were trained as engineers after all) assembled in the right order will potentially generate value which is far more than the sum of the inputs. The first layer in the Value Stack is Proprietary Power which is when the conditions are right tightly coupled with Product Power (the second layer). The business model layer is next the stack and so on. When all the layers are skillfully put into place in the right order, Floodgate’s thesis is that the value created by the process increases non-linearly. This is an example of what Charlie Munger calls “a lollapalooza.”

Maples is naturally focused on the lower layers in the Value Stack since he is an early stage investor, but even then, the potential for the higher layers must be there and some groundwork done on the higher layers.

Maples depicts the Floodgate stack as follows:

value stack

PROPRIETARY POWER: “is about having a structural competitive advantage is critical for avoiding mindless competition.”

  1. “Whenever I look at a company that says they have a technology advantage, I’m interested in a couple things. One is, just what is the advantage, and why would it be hard to copy? But then the other part of the question is, why now? Why did something in the world change to open the world for this opportunity? [For example] if you’re doing topological data analysis, why couldn’t that have been done five years ago? Why couldn’t that have been done 10 years ago? Well it turned out that computational capacity in the cloud was improving, improving, improving at the rate of Moore’s Law, and eventually converged at a critical point where it became practical.” “The problem with mimetic desire is that it’s the wrong ‘personal operating system’ for coming up with a breakthrough idea — it is by definition an incrementalist view of the world that emphasizes following the rules and outcompeting others, rather than re-inventing the rules and transcending competition.”

Strategy is important at every stage of the life cycle of any business. If investors can’t see a source of sustainable competitive advantage it will be hard to raise a financing round. A startup can easily die an early death without some credible of path to achieving a sustainable competitive advantage. Someone may say: “Wait what does this competitive advantage concept really mean?” What it means is that unless there is some constraint on supply it will increase until profit is equal to the opportunity cost of capital. Here’s an example: Imagine you have a stand selling bananas on a city street. And 26 other people start going the same thing sourcing the bananas from your wholesale supplier. That is an extreme example of zero proprietary power. Maples adds: “The best way to compete is to choose not to.” Strategy is what you do differently than your competitors. It is about choosing what not to do.

If you want to understand more about strategy people like Bill Gurley suggest reading Porter’s book Competitive Strategy.


In his search for proprietary power Maples is looking for a breakthrough idea that re-invents rules and transcends competition. What is it that the business will do that is unique? What rule can it break that others thought it was sacrosanct? This is where thinking different can pay in a huge way once in a while. Thinking and acting different will not always succeed, but when it does: boom!

Maples has said on other occasions that lower costs at seed stage are both good news and bad news. Here is his slide:

up down

Let’s be clear that this is a discussion about startups that are suitable for an investment by a leading venture capitalist like Maples. This post is not about opening a new bicycle repair shop. As will be explained below, a business must have a number of essential qualities to be suitable for a venture investment. To put the challenge in context, only 800 new firms raised a Series A round in venture capital in the US in 2016. While this represents a tiny percentage of overall business starts in that year or any year, a few of these business will have an out-sized impact on society. Can the number of series A investments in a given year go up? Organizations like Y Combinator, 500 Startups and Angel List are pushing hard to change this. I hope they are successful, but we do not know the outcome yet.

  1. “The most valuable businesses in the world are going to be networks. I believe the big companies of the world today, if they don’t position themselves to be network-centric, they will fail. I believe that Tesla is a network centric car company. I believe Apple is a network centric phone company. I believe that the twin powers of Moore’s Law and Metcalfe’s Law are what is going to bring abundance to the world in the next 10 or 15 years.”  “If you’re going to build a network effects business, it’s important to ask yourself, what is my network? What are the nodes of the network? How do they connect with each other? Where are the connections strong? Where are they not strong? Is it a global network? Is it a hub and spoke network? What does it mean for me to be the network operator? Interestingly, network effect businesses have existed for a long time. They existed with the railroads, they existed with canals, they existed with RCA, with records, and TV. They existed with Craig McCaw and McCaw Cellular.”

The factor that creates the most competitive advantage in the business world today is network effects. The increased importance of network effects is explained by what Marc Andreessen calls “software eating the world” (the increased important of software in business value chains). Another multiplier of the importance of network effects is that so many systems and networks are now interconnected. Other factors that can potentially create product power like patents, economies of scale and regulatory advantages are still important, especially when combined with network effects, but they are relatively less important than they were in the past.  I do appreciate the shout out by Maples to McCaw Cellular and Craig McCaw since that is part of my heritage. People in many cases have forgotten how capital intensive the early cellular business was particularity for new entrants and how much money had to be raised in places like the high yield markets to make the business model work. They were not the “capital light” platform businesses that Warren Buffet marveled about at the last Berkshire shareholder meeting.

PRODUCT POWER: “is about achieving product/market fit.”

  1. “Have you ever seen a startup where you’re like, how in the hell could they have been successful? It’s because they met a great market. And sometimes, your product, your market, it just has the magic. You can’t beat customers off with a stick. They just want it. I’ve had this happen to me before, where in spite of the fact that the product just seemed horrible on the surface, it just didn’t matter. People wanted it really bad. Product market fit is more of like a dance between the product and the market. You know it’s like if you ever see two people doing the tango, I look at it like the product is leading the dance, but the market is tangoing with the product. I’ll try to be G-rated in my language, but sort of an intimate sort of back and forth between them. And what I find is that if you want to get the tango right, the first thing is to really identify the market. Large, strong customer desire and the right time. You want to find markets where people gravitate to your idea and want it right now, as soon as possible, even if it’s half done. And then that market pulls the product. When a market pulls a product, this is what it feels like inside the building. Nobody’s debating what the features of the next version ought to be, because they’re like, oh my god. This stuff is flying off the shelves, and our customer needs us to fix x, y, and z. And you’re like, OK well let’s fix it. And so that’s what it feels like when the market’s pulling the product. Whereas where the market’s not pulling the product, the conversations in the building are arguments over, why aren’t those customers smart enough to figure out how awesome our stuff is?”

When a business has discovered genuine product/market fit the business will know it.  The primary focus of the business will be on satisfying demand. If the team is spending all their time adding features, the business has not yet found product/market fit. The best businesses generate organic growth and do not need Herculean spending on marketing and sales.

  1. “Most investors are overly focused on traction right now. The problem with that is it can be gamed in the short term. And even worse, it often instills a mindset of iterating metrics to nowhere. It’s more important to us that the startup has a structural competitive advantage and is on the path to creating a product that blows people away in large potential numbers. I have never seen an awesome product with a fundamental advantage and lots of potentially delighted customers not be able to make money.”

Maples is pointing out that without a proven value hypothesis a decision by a business to proceed with proving they have a solid growth hypothesis is counterproductive since resources are being wasted. Traction with a product that lacks core product value won’t last.  That some investors and business put too much focus on traction at seed stage does not mean that traction does not matter.

Yes, eventfully the growth hypothesis must be proven. Maples once included these benchmarks in a slide deck:


BUSINESS MODEL POWER:  “involves translating a startup’s innovation into attractive profits that can improve rapidly.’

  1. “A business model is the way that a business converts innovation into economic value.” “You just have to discover it, but is there always. And then increasing margins and pricing power are proof that the first two layers are strong. It’s axiomatic that if your pricing power is going down, the first two layers aren’t that strong. Either that, or you’re dumb at pricing. But it’s more likely that you’ve overestimated how compelling your product is or how strong your competitive advantage is. The Business Model Canvas by Alex Osterwalder is good to look at for this. But a lot of what I find about business modeling is it is just intuition. When you get to know the customer really well and what they value, it just seems to work.’

Business models fascinate me since they are all unique and are always changing in an environment that is always changing. They all also must cope with nests of complex adaptive systems. The number of potential business model permutations are endless. How can any game on Earth be more interesting than that?

Maples and a group of people like his partner Ann Miura-Ko as well as Steve Black and Eris Reis clearly talk a lot and share many of the same ideas. The output of this process is interesting since it reflects an engineering approach to creating new businesses. Actually going through the Business Model Canvas by Alex Osterwalder (see below) with real examples is quite an instructional process.


COMPANY POWER “is about avoiding management and technical debt.”

  1. “The common element of Twitter, Lyft, Twitch.tv, Okta, Demandforce, Weebly, Chegg, Xamarin, Refinery29, Spiceworks, Playdom, and ngmoco] as startups is that their teams were amazing. They were amazing in their domain knowledge for the products they were building and they were amazing at their ability to ‘McGyver’ great outcomes in harrowing and uncertain circumstances. It’s surprisingly rare for a startup team to be able to execute at the level of speed, urgency, and precision required to build a real company.”

Three essential elements in a startup are team, market and product. Or market, team and product. This is essentially another mental model or stack that is useful in understanding a business. The degree of emphasis varies on the first two elements depending on the venture capitalist.  Certain people and teams in certain situations are capable of amazing feats of creativity. More money is not necessary and in some cases is a hindrance.

Before proceeding to the next quote, a side bar on technical and management debt is perhaps useful. Let’s start with a Wikipedia definition:

“Technical debt (also known as design debt or code debt) is ‘a concept in programming that reflects the extra development work that arises when code that is easy to implement in the short run is used instead of applying the best overall solution’. If technical debt is not repaid, it can accumulate ‘interest’, making it harder to implement changes later on.”

Management debt is incurred when a founder or manager makes expedient, short-term management decisions which have costly long-term consequences. If management debt is not repaid, it can accumulate ‘interest’, making it harder to implement changes later on.

  1. “A lot of the good companies that I’ve seen actually proactively define their culture. And they emphasize what that is their first 20 employees, and then it kind of takes a life of its own. Why do you want that? It’s sort of like when ducks fly south for the winter, you don’t have to tell the ducks in the back of the v, get in the v. They just know. And when a company gets into blitz scaling mode, you don’t have time to tell the hundreds of new employees that you hire, here’s how decisions get made here, here’s what we value, here’s how we make tradeoffs at the margin. They have to be programmed in the DNA of how they participate in the company. Basic management systems. This has to do with just one-on-one meetings, board meetings, team meetings, forecasting frameworks. You know, what gets covered in those meetings, what shouldn’t get covered in those meetings. Just having a sort of a philosophy of that going in can save a lot of time and avoid a lot of management debt.”

The right company culture not only allows a business to scale, but minimize and resolve problems as they arise.  It allows decision-making to be distributed, optimized and expedited. Warren Buffett has written: In businesses, culture counts….Cultures self-propagate. Winston Churchill once said, ‘You shape your houses and then they shape you.’ That wisdom applies to businesses as well.” A partner from the venture capital firm Greylock had a blog posted recently in which they said: “Culture Is How You Act When No One Is Looking.” The title alone makes a strong point. When you are working with people you know and trust, tremendous efficiencies are created. Charlie Munger has said on the importance of culture:

“The highest form a civilization can reach is a seamless web of deserved trust.” “The right culture, the highest and best culture, is a seamless web of deserved trust.” “Not much procedure, just totally reliable people correctly trusting one another. That’s the way an operating room works at the Mayo Clinic.” “One solution fits all is not the way to go. All these cultures are different. The right culture for the Mayo Clinic is different from the right culture at a Hollywood movie studio. You can’t run all these places with a cookie-cutter solution.”

  1. CATEGORY POWER: “is [about] designing and owning a category [so as to make] the business the “Category King” [which] usually capture 70–80% of the profit pool in their markets.”

This is the least important layer for a seed stage business, but as I noted above the potential for this layer is attractive to an early stage investor. In this layer along with the Company Power layer ground work is still being done at seed stage says Maples. Ann Miura Ko describes the Category Power layer this way:

“One thing we have noticed is the best companies will spend the time to create a whole new category in the market for themselves, because they don’t want to compete on other people’s terms. They want to be the only Thunder Lizard on the block. For example, Netflix didn’t start out trying to be a better Blockbuster. They created their own separate category and then completely destroyed Blockbuster. Another example is Starbucks — who would have ever thought people would buy $5 coffees when other coffees at that time was selling for 50 cents. They created their own new category. Category power is the ability for the founders to think about the language of the market they are going into, and how they define this for their company. If they are allowing the existing market to define who they are — we get worried about this.” 


  1. “I’m interested in not just companies that are doing a startup, but companies that are doing something hyper-exceptional. And I was seeking a metaphor to describe these companies. And I wanted it to combine the ideas of being big, adaptable, fearsome, radioactive. And it just didn’t seem right to use a term like ‘disruptive innovation’ or something to academic-y sounding, even though we are in an esteemed academic institution right now. So I came up with this term ‘thunder lizard’ about 20 years ago. And thunder lizards, for those of you who are not familiar with Godzilla, were hatched from radioactive atomic eggs. And this is actually the stage of the market that we, at Floodgate, like to invest in. And so we like to say that our job is to spot radioactive atomic eggs. When we invested in Twitter, they weren’t sure whether they were going to call it TWTR, or TWTTR, or Voicemail 2.0. And when we invested in Lyft before it launched, we had to get comfortable with the legal ambiguity of that service. And so at the time that we see this stuff, it’s hard to even know what it’s going to mutate into. But the goal is to find companies that have radioactivity at their roots. And then they swim across the ocean, and emerge with an attitude. And then they begin to devour their startup competitors right as they hit the beach. And then not long after that, they begin to disrupt even more, swiping holes into the sides of buildings, and then eventually, they attack the incumbents. The incumbents in the market are represented by those trains that he’s eating like sausage links. So now you know what thunder lizards are.” “My job is to spot radioactive eggs and to determine if they have that energy to morph into something, to mutate.”  “Of tens of thousands of companies started a year, 97 percent of the exit profits will likely come from less than ten….the point one percent. Our job is to find the point-one percent. But we have an extra twist. We want to avoid competing in a fiercely crowded landscape of established Series A funds. So we have to find these companies at the crazy, risky, and early time before Sand Hill Road is excited. When we are right, we will be rewarded because we will have been able to invest smaller amounts of money at lower valuations. That’s what makes our math work. So, as a general rule we like to see any startup idea that has the chance to be meaningful enough to be in the top point-one percent. But we try not to be too dogmatic about the areas we are focused on. We believe that knowing the rare exceptional startup when you see it is the more important skill.”

What I like about the term Thunder Lizard and I don’t like about Unicorn is that the “U” word does not refer to a business that has actually generated a financial exit for investors.  The term Unicorn encourages bad behavior. I actually use the term Grand Slam myself and definite that term like Maples does with Thunder Lizard to include an actual financial exit.

Maples says he is looking for “radioactive eggs” that can turn into “Thunder Lizards.” I like his taxonomy since not all startups are eggs that can eventually produce a lizard that is as powerful as Godzilla. There are more “radioactive eggs” today that are possible investments by top tier venture firms. Business formation in this Thunder Lizard category is up. But in the non Thunder Lizard category the numbers are down, This statistic makes the point: “the economy hatched 154,000 fewer new companies in 2014.”  A bicycle repair shop or food tuck are not a radioactive egg. To grow the economy and create new jobs we need lots more new business that are not radioactive eggs.

  1. “The first thing that I like to emphasize to people when they start a company is, start a company that’s worthy of your talents that you think represents the absolute utmost gift you have to offer to this world in your life. Because to be one of those, that’s what it takes. People shouldn’t just be doing a startup. Well, I should back up. If you decide to just be doing a startup, that’s fine. But that’s kind of like the decision to join a nonprofit. Or it’s kind of like a decision to– it’s kind of a labor of love, it may make the world better. But don’t do it because you think you’re going to make money approaching it that way. Because that’s not what the objective function of the industry is.”

Starting a business that has the potential to be a Thunder Lizard is far more of a calling rather than a rational act. Missionaries are far more likely to succeed than mercenaries when the act is not rational. It is impossible to fake the feeling that makes someone a missionary rather than a mercenary.  The founder may fool some of the people some of the time, but in the end the truth will come out. They will eventually hit one of the lows that are an inevitable part of what Ben Horowitz calls “the Struggle” and you will bail out. Hoping that the economics of the venture capital world will bend just for them is a triumph of hope over experience.

People say flying a commercial airplanes is composed of long periods of boredom interspersed with a few minutes of terror. A startup is the reverse: long periods of struggle and terror interspersed with a few minutes terror. Am I exaggerating a bit? Sure, comedy requires exaggeration. Did I often have a weird kind of fun and feel accomplishment when I was helping to build Teledesic? Absolutely. Would a team of mercenaries have been able to do what the team of Teledesic missionaries accomplished? No way. My startup experience give me lots to be humble about. I learned a lot. It was also financially rewarding for me since as I explained in my blog post on Teledesic, early investors and employees received a significant multiple on their investment or stock options. Later investor were not so lucky.

  1. “Bill Gates didn’t need to be in Silicon Valley to start Microsoft. Jeff Bezos didn’t need to be in Silicon Valley to start Amazon. Great companies happen because of great founders, not because of where they are or who the VCs are or any of that nonsense.” “I just don’t believe that VCs animate much. I believe that entrepreneurs animate things.”

There will never be another Silicon Valley. But other cities and regions can create a successful technology-driven economy in their own way. In order to achieve this goal, a city or region must and find its own comparative/competitive advantage. The best way to do that is to create a pool of great founders since venture capital will always follow great founders. As an example, when venture capital started in northern California the venture capitalists had their offices in San Francisco. When the founders moved south toward the Stanford campus the venture capitalists moved to Sand Hill Road. When the founders started moving back to San Francisco so did the venture capitalists. Another example of capital chasing great founders is Benchmark investing in Zillow in Seattle and Snap in Los Angeles. Money will always follow opportunity and the opportunity is created by great founders.

The best single way for a city to create a supply of great founders is to have at least one world class research university. Any city or region that wants to well in a modern economy that does not have a major research university is operating at a serious handicap. There are other things a city can do like having a culture that does not treat failure at trying something hard as anything but a great learning experience. Great K-12 schools, a diverse population and a healthy environment help too. Success feeds back on itself in that great founders inspire and attract more great founders.

One final note relates to the power laws that are pervasive in venture capital. With power laws most values are below average and a few outliers are far above. This means that average figures are close to meaningless. Power laws apply not just the distribution of success of venture-backed companies in a country or globally, but to the success of startups within a city or the success of venture firms operating in a city. For example if you take the “multiple on invested capital” of the top 10% of venture firms in Silicon Valley that MOIC will be far above the average MOIC since the distribution is not a bell curve. If you take the MOIC of the top 1% of venture firms in Silicon Valley, the MOIC will be even higher. In venture capital it is the outliers that matter most. This power law distribution exists in an industry but also within a city.


Dare to do Legendary Things http://ecorner.stanford.edu/videos/3740/Dare-to-Do-Legendary-Things-Entire-Talk

Slide deck:  https://www.dropbox.com/s/z8io37mqoctale9/Capital%20Factory%20VC%20Primer%205-4-16%20PDF.pdf?dl=0

Slide deck: https://medium.com/@m2jr/beyond-lean-startups-pre-money-keynote-speech-from-6-22-16-11aa0257901b

Secrets https://austinstartups.com/finding-billion-dollar-secrets-95fb2b6489fb

Dare to Make your Startup Legendary https://medium.com/floodgate-fund/dare-to-make-your-startup-legendary-dc8eb68ba1fc

Vantor TV http://vator.tv/news/2016-01-15-meet-mike-maples-managing-partner-at-floodgate

Interview http://www.siliconhillsnews.com/2016/05/06/mike-maples-jr-talks-about-tncs-thunder-lizards-and-network-capitalism-at-longhorn-startup-demo-day/

Thunder Lizards https://techcrunch.com/2010/02/21/mike-maples-talks-venture-capital-and-thunder-lizards/

Forbes interview https://www.forbes.com/sites/petercohan/2012/12/11/how-mike-maples-jr-became-one-silicon-valleys-great-investors/#4c02eb41301c

Category Kings https://techcrunch.com/2016/10/10/floodgates-mike-maples-on-what-makes-category-kings/

Greylock post https://news.greylock.com/culture-is-how-you-act-when-no-one-is-looking-f29d5dd16ecb


A Dozen Thoughts from Charlie Munger from the 2017 Berkshire Annual Meeting

  1. “To make teaching endurable, it has to have enough wiseassery in it. And we do.” “We’ve done a lot of preaching [about investing] to not much effect.” “To the extent you’re working on it, you’re on the side of angels, but lots of luck.”

Munger has tapped into something that makes his ideas both memorable and understandable. He is suggesting in these sentences above that part of his success as a teacher is that he injects a certain amount of “wiseassery” into his delivery.  The dictionary definition of wise ass is: “a person who is irritating because they behave as if they know everything, often in a way that is quite humorous but potentially insulting.” While a wiseass may be an effective teacher, Munger once suggested that he does not make for a good role model since what he says is often too controversial which can create significant problems. But the world would be a dreary and less interesting place if there wasn’t someone in it who said things like:

“I don’t think I’m a good example to the young.  I don’t want to encourage people to follow my particular path. I do not want a proctologist who knows Schopenhauer, or astrophysics.  I want a man whose specialized.  That’s the way the market is.  And you should never forget that.  On the other hand, I don’t think you’d have much of a life if all you did was proctology.”


“You do not want your first-grade school teacher to be fornicating on the floor or drinking alcohol in the closet and, similarly, you do not want your stock exchange executives to be setting the wrong moral example.”

To be a wise ass in public in the cause of educating the public requires a rather thick skin, which Munger clearly has. His willingness to say the truth out loud is a needed antidote to somethings that are wrong in the world today. Munger has also said that what brought he and Warren together as friends and business partners Munger was that they are both “natural wiseasses.  I’m not the only wise ass in the world. Warren can find another one.”

Teaching people anything, particularly about investing, is hard. Charlie has said that he has trouble getting his own family to follow value investing principles so he has little hope of his ideas being widely adapted. I think Munger understates his influence, but it may be true that he has helped more people improve the way they think than the way they invest. One final Munger thought on teaching is: “I think the only way you’ve got a chance is sort of by example. If you want to improve your grandchildren the best way is to fix yourself.”

One last point here I can’t resist. I know a blogger who Tweeted recently that he was responding to “hate mail.” He is a nice fellow who is trying to teach people a few things. That people are sending him hate mail is bullshit. Debating ideas is one thing but hate is quite another. People who are haters are often making up for something. like being teased in middle school for having small hands.  The unfortumate reality is that you need to either have think skin like Munger or quit blogging/ tweeting/writing. “Haters gonna hate” is the sad truth.  It is an advantage to not give a damn what people say. I like this from Felicia Horowitz:


  1. “A life properly lived is just learn, learn, learn all the time.” “If we had stopped learning, you [Berkshire shareholders] wouldn’t be here – you’d be alive, probably, but you wouldn’t be here.” “There’s nothing like a personal, painful experience if we want to learn, and we certainly have had our share of it.”  “There’s nothing like the pain of getting into a lousy business to find a good one.”  “We were young and ignorant then; Now we’re old and ignorant.” “Experience is like eating cockleburs – it really gets your attention.” “It is a good idea to not play where the other people are better.”

You may or may not know that a cocklebur is one of these little spiked seed pods that may attach itself to your shoes, socks or clothing, especially if you enjoy walking in riverbeds or pastures. I don’t think I have ever mistakenly eaten one, but I expect that it would not be pleasant. When you read the Munger quote if you found yourself wanting to know (or make sure you knew) what a cocklebur was, you are more likely to be a learning machine. Munger is pointing out that one very effective way to be a learning machine to pay close attention to your own mistakes. If you are not making some mistakes you not learning. The same thing goes for making too many mistakes that are not new mistakes. He also believes that if you are not changing your mind on some important questions each year you are not learning either. Munger believes: “Learning has never been work for me. It’s play.” Life gets better if you adopt this approach to learning.

  1. “The investment world has gotten tougher. Maybe now we have small statistical advantages, when before it was like shooting fish in a barrel.” “We can’t bring back the low hanging fruit; we will have to reach for higher branches.”

 Anyone who doesn’t realize that more competition has arrived in the investing world isn’t paying attention. The more widely held the asset class the more intense the competition has become. This is not new but the trend seem to have accelerated. It is hard to imagine that it was possible in the days of Ben Graham to buy companies at less than liquidation value. As just one example of how investing has become more competitive, Michael Mauboussin writes:

“Exhibit 1 shows that the standard deviation of excess returns has trended lower for U.S. large capitalization mutual funds over the past five decades. The exhibit shows the five-year, rolling standard deviation of excess returns for all funds that existed at that time. This also fits with the story of declining variance in skill along with steady variance in luck. These analyses introduce the possibility that the aggregate amount of available alpha—a measure of risk-adjusted excess returns—has been shrinking over time as investors have become more skillful. Investing is a zero- sum game in the sense that one investor’s outperformance of a benchmark must match another investor’s underperformance. Add in the fact that in aggregate investors earn a rate of return less than that of the market as a consequence of fees, and the challenge for active managers becomes clear.”


  1. “An expert who is really good at money management suffers terrible performance problems when he gets more money in.” “In the future, with our present size, in terms of rates of return will be less glorious than the past we keep saying it now we are proving it. But it is still a collection of businesses on average that has a better investment return than the S&P 500.”

Munger: “It’s a lot harder now (with $90B in cash to deploy).”

Munger: “$150B is probably too big for us.”

Buffett: “We both would do a very big deal.”

Munger: “We don’t have to agree perfectly.”

Buffett: “If we found a deal that makes compelling sense, we would do it.”

Munger: “Now you’re talking.”

Investing large sums of money a market like we are in now is particularly hard. That is why some fund managers return cash or keep funds smaller that they could raise relative to demand.  Warren Buffett’s friend the famous investor Bill Ruane said once: “Staying small is simply good business. There aren’t that many great companies.” It is beyond question that the size of the portfolio is a drag on performance.  The bigger the fund the harder it is to outperform. Buffett puts it this way: “Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money.”

  1. “The first rule of fishing is to fish where the fish are, and the second is don’t forget the first.” “We’ve gotten good at fishing where the fish are. There’s too many boats in the damn water, but the fish are still in it.” A good fisherman can find more fish in China; it’s a happier hunting ground.”

Munger loves fishing and fishing sayings. There are of course other fising sayings like “fish or cut bait” and of course his story about visiting the tackle shop. William Safire in his Political Dictionary wrote:

fish for votes

The tackle shop story? Chris Davis tells it here in this one minute video: http://davisfunds.com/document/video/charlie_munger_fishing_lure

As an aside, in Wisconsin, populations of silver pike have been reported in Munger lake in Oconto County.



  1. “I do think the Chinese stock market is cheaper than the American market. China has a bright future.” “Too many people believe in luck and gamble, and that’s a national defect.There will be growing pains of course.”

Munger said that China was not an easy market to invest in due to opaque financial reporting but it is a better place to find bargains still. Munger said: “One of the things we got into [in China] was the Shanghai airport, the main airport in China, with no debt net. How can you lose owning the main airport in China? It takes extra work. But why should it be easy to get rich?”

  1. “If all [a business owner] cares about is getting highest price, we are not a good call. We can offer happiness to a person who sells us the business. He will have lots of money and be doing what he loves doing while leaving family and employees in the best possible position. This is not the equation of many people who buy businesses borrowing everything they can and resell after dressing up the accounting.” “Don’t call leveraged buyouts private equity – that’s like a janitor calling himself chief of engineering.” “We do well, because people don’t want to sell to those guys.” “There is an army of people in finance and shadow banking who are leveraging these deals with liberal leverage and of course they pay very high prices and they get part of the upside and they don’t take any of the downside and they get fees off the top. So it is fee driven buying and it is very extreme.  Of course, it makes it hard for us to buy companies.

People who sell businesses to Berkshire are rich enough that they have more money than they will ever need. Berkshire gives the selling owner the chance to make sure that the business they care about and the people that work there continue to thrive. For this reason, Berkshire gets offered the opportunity to buy businesses at very attractive prices. Warren Buffett said in the most recent shareholder’s meeting: “Private equity firms buy businesses, but they’re looking to sell those holdings down the road.”  To reassure selling owners, Warren Buffett holds on to businesses even if returns are less than stellar. Here’s Buffett on this point:

“You would not get a passing grade in business school if you put down our principles for why we keep some businesses, but we made a promise. If we don’t keep our promise, word would get around. We list the economic principles, so managers who sell to us know they can count on it. We can’t make some promises, and we don’t promise never to sell. But we’ve only had to get rid of a few businesses, including the original textile business. We also let managers continue to run their business. We are now in class that is hard to compete with. A private equity firm won’t be impressed by what we put in the back of our annual report. People who are rich and run a company their grandfather started –they don’t want to hand it over to a couple MBAs who want to show their stuff. As long as we behave properly, we will maintain that asset, and many will have trouble competing with it.”

 8. “If things go to hell in a hand basket and then get better later, we will do better than others. We are good at navigating through that kind of stuff.” “When the rest of world is fearful, we know America will come out fine. We won’t put the company at risk. We’ll grab all the opportunities we can without losing sleep.” “Fear spreads like you can’t believe, unless you’ve seen it.” “Everywhere you look in Berkshire Hathaway someone is being sensible. Combine that with being very opportunistic so when some panic or something comes along it’s like playing a one-hand sport with two hands.”

Buffett and Munger don’t time markets but they do buy more companies when they are undervalued and buy less when market are high.

daily j

 9. “What was done [at Amazon] was very difficult; it was not at all obvious that it was going to work as well as it did. Other things were easier, and we screwed those up. I don’t regret missing it – I do with Google. We’ll miss out on more, but that’s our secret – we don’t miss out on them all.” “You can read Bezos’ annual report in 1997, and he lays it all out. And he has done it and done it in spades. It just always looked expensive.”  “We are sort of like the Mellons – old fashioned folks who’ve done right, and Jeff Bezos is a different species.”

When asked in a press interview why he did not buy Amazon shares Buffett said on CNBC:


 10. “It’s a very good thing that Warren bought Apple. Either he’s gone crazy or is learning. I prefer to think he’s learning.” “The world has changed a lot, and people who’ve gotten into these [capital light] businesses have done very well.” “Now Warren did run around and take his grandchildren’s tablets away for market research.” “We failed you [on Google]. We were smart enough to do it and we didn’t.”

At Munger and Buffett he used their error of omission on Google to illustrate how you can learn from experience. Buffett said:


Buffett said, “The five largest market cap companies in America are worth $2.5 trillion and require no equity capital. That is an extraordinary change from the past,


  1. “A lot of other people are trying to be brilliant and we are just trying to be rational. Trying to be brilliant is very dangerous, particularly when gambling.”   

My post on this is: A Dozen Things I’ve Learned from Charlie Munger about Making Rational Decisions

 12. “We don’t want to go back to subsistence farming. I had a week of it and hated it growing up. I also don’t miss the elevator operator sitting there with a crank.” “No one ever complained about the advent of air conditioning. I am worried more about the change not being fast enough.”

Productivity getting better is what makes the quality of a person’s like get better. Munger believes that what we need to realize is that people get hurt by this shift and we need to help them make the transition. One of the more impressive arguments I have seen on issues related to productivity and innovation set of issues was made recently by Marc Andreessen.  Marc said:

“There are two very different parts of the economy. There’s the part where there’s rapid technological change and very rapid productivity improvement. You’ve got this other, second part of the economy that’s the exact opposite — where quality is not improving and prices are rising.” “The economy has bifurcated. In high productivity sectors, prices are crashing. The sectors where prices crashing are shrinking as a percentage of the economy. TVs are going to cost ten dollars and health care is going to cost a million dollars.” “The rising cost of a modern college education is just staggering. In the industries where there’s rapid productivity growth, everybody is freaked out, because what are people going to do after everything gets automated? In the other part of the economy, that second part, health care and education, people are freaked out about, ‘Oh my God, it’s going to eat the entire budget! It’s going to eat my personal budget. Health care and education is going to be every dollar I make as income, and it’s going to eat the national budget and drive the United States bankrupt!’ And everybody in the economy is going to become either a nurse or teacher. Both sides of the economy get polar opposite emotional reactions.”

Today’s technology advances often produce efficiency improvements which in turn produce lower costs, which translates into lower spending and measured GDP. More is being done with less and yet traditional measurements say that productivity is decreasing since less money is being spent in more productive sectors. In addition, many people assume that innovation always creates more producer surplus and profit. Charlie Munger describes the reality: “The great lesson in microeconomics is to discriminate between when technology is going to help you and when it’s going to kill you. And most people do not get this straight in their heads. There are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that’s still going to be lousy. The money still won’t come to you. All of the advantages from great improvements are going to flow through to the customers.” These are confusing times, but that is no reason to adopt a pessimistic outlook on the potential of innovation to create enormously beneficial impacts. There is no question that today’s economy and the technological changes that power the economy have created a significant number of new problems like worker retraining that we must solve. We must discover new solutions to these new problems and this will require innovations of many kinds. Andreessen argues that we don’t have enough technological innovation: “With higher productivity growth, we’d have higher economic growth and more opportunity. But without enough opportunity, we’re all at risk on all sides of the ideological spectrum.”














A Dozen Lessons on Building a Business from Sarah Tavel


  1. “Ultimately when evaluating an early stage company, I say it’s a combination of art and science. The art is understanding how products work, the science is knowing how to measure it. The earlier the company, the more it is about art, which in this case is assessing what I think of the product and the use case.” 

Tavel is a great fit for Benchmark since the firm has always believed what they do is a craft. I wrote about this in my blog posts on Andy Rachleff, Peter Fenton and Bill Gurley. Fenton has said:

“because we love the day-to-day work with the entrepreneurs, [it] prevents us from scaling. We don’t have an ability to offload any part of our relationship in the way we practice it, to anyone other than ourselves. So, there’s no associates, no principals, there is really nothing beyond the group of people here and our assistants who keep our lives sane. That’s a strategy.”

What Benchmark partners like to do is invest early and work shoulder-to-shoulder with entrepreneurs. The Benchmark partners would use that approach even if it was not the best way to optimize their financial return since it is what they enjoy most about the process. The “art” of venture capital Tavel is referring to is often found in pattern recognition and that is highly related to good judgment which often comes from first party bad judgment or what Will Rogers once called watching other people pee on an electric fence (third party band judgement). It is important to note that a critically important part of the pattern recognition in venture capital is finding the exception to previous patterns that is different. Part of the pattern is: some rule that other people preciously believed was important is being broken by the best startups, but some rules that other people thought were important are being followed. It is a bit like the spot the difference game, except it must be a very important difference that delivers significant new core value to a really big market.

I have written about the science part of the entrepreneurial process quite a bit lately. Generating growth in a startup is accelerated by great data science because it allows you to measure results and apply the scientific method to growth experiments. When founders get access to great data science they have a greater ability to scale their output and most importantly make their creative contribution enduring. Data science does not eliminate the need for creative sparks, but when used effectively it facilitates creativity by enabling rigorous experimentation and increases the impact and growth of the business.    

  1. “For seed investments, it’s always first team, and second, believing in what they’re doing (as early as it is). I’ve passed on opportunities that had amazing teams, but I just couldn’t get behind what they were doing, for whatever reason. It doesn’t feel authentic to me to just make an investment on #1, if I’ll spend our conversations together trying to convince them that they should change #2. So really both need to line up for me.”

One of the reasons I write about so many different venture capitalists is to make the point by example that there is no cookie cutter way to be successful investing in startups. There are many similarities and common elements, but many differences too. My view is that there are different pools of alpha and different people search for that alpha in different ways. Of course, some investors are more successful than others. Typically the investors that are most successful chose an approach that is most consistent with their nature and unique skills. Benchmark co-founder Bruce Dunlevie puts the strength of the team at the top of the early stage investing hierarchy. Another Benchmark co-founder Andy Rachleff puts more emphasis on the existence of a very large addressable market. Of course, this is a matter of emphasis as both the right team and the right market are important. That Benchmark has adopted a craft rather than a platform approach to their business does not mean that other approaches by other venture capitalists do not work. It is just the right approach for them as individuals and gives then a unique service to offer founders.  Some founders will be more comfortable with a full service venture capital platforms. Some will not. Vive la différence. Strategy is what you do differently than your competitors. You must be different and you must be right about that difference if the strategy is going to be successful. 

  1. “Spend money very very carefully until you have product market fit. You want as lean a team as possible before you get there. There is no point of hiring more than the bare minimum team (usually just the co-founders) before you figure out what users want. Then you scale. Companies that hire before that waste runway, and that’s a shame. Once you have product market fit, you still need to be careful with hiring. 

The critical point Tavel is making is that it make no sense to pursue a growth hypothesis before the company has solved the value hypothesis. Why would you try to get more people to use a product that does not have core product value? It is not only hard to create core product value but the discovery process (if it happens) inevitably requires time and experimentation. The shorter the financial runway of the business the less opportunity exists for the startup to discover product market fit and solidify its value hypothesis. Tavel also notes that hiring is something to be approached with care even after the value hypothesis is proven. Early hires are particularly important as they create the business’ DNA place much more than later hires. Company culture is far more a determinant of success than people imagine. 

  1. “Another thing I see is scaling too quickly, particularly for local businesses. I see a lot a company launch something in one city, and before they’ve figured out the playbook, launch a bunch of other cities which burns through their cash, without really figuring out how to make it work in any one city.” 

Benchmark’s Bill Gurley has said: “We like to say that ‘more startups die of indigestion than starvation.’” One cause of death by indigestion is premature scaling of a growth hypothesis that has not been proven. Putting fuel in a rocket which does not have an attractive target and a working guidance system is a bad idea. Even if there is product market fit, there is a right time to spending big on generating growth and that time if after a sound growth hypothesis has been proven. 

  1. “I’d say that companies that have the greatest chances of becoming sustainable unicorns have incredibly strong network effects or economies of scale. More often than not, you find this with platforms/marketplaces, but not always. e.g., companies like Amazon or big banks, have very strong economies of scale, that make it very difficult to compete. But they take an enormous amount of capital to build.” 

Tavel is pointing out that the primary means of defending a business against competitors today is network effects. My blog post on network effects is here. Other approaches that can create a barrier to entry like economies of scale, regulatory expertise, intellectual property and brand still matter, but they are relatively less important than they once were, especially in the case of software startups. Economies of scale are desirable and complement network effects in many cases, but Tavel is pointing out that they are not “capital light.” One of the big changes in the business world that Charlie Munger and Warren Buffett talked about at the recent Berkshire meeting was the appearance of technology businesses that do not require much capital.

  1. Growing users without growing users completing the core action is the empty calories of growth. It feels good, but it’s not good for you. What is a core action? The action that is the very foundation and essence of your product. Pinterest would not exist without pinning. Twitter would not exist without tweeting.” 

There are a number of terms used to describe the factors that can create sustainable growth. One term that I like is the concept core product value, which represents a solution a real and significant problem that is valuable enough to cause people to want to pay for a product. Core product value is first recognized when the customer connects with the product in what is known as a “magic moment.” A magic moment is a realization or reaffirmation by a customer that a product has core product value. Tavel is saying that that a “core action” is what the customer does to realize core value.

There are different types of magic moments. My taxonomy is as follows:

  1. Hook magic moment – a realization of core product value that occurs within the first 15 seconds of customer on boarding that creates retention. There should be as little friction as possible in getting the visitor to the Hook magic moment as fast as possible.  Delivering the core experience quickly without overwhelming the visitor with features and sign up requirements is critical. For example, Alex Schultz of Facebook explains:

“[if you want] people to buy an item on eBay, should I land them on the registration page or the search results page?” You’d probably land them on the search results page, and that would get them to that magic moment faster. What is the moment when you used AirBnB? What  is the moment when you used DoorDash, when you used Slack, when you used Facebook,  LinkedIn, WhatsApp? Whatever the product, what is that moment when you went, ‘Yes. I’ve got  it.’ On Facebook it’s friends. Getting  that first person reserve your house, staying at that first property, those are our magic  moments. eBay, buying your first item from a stranger online.”

Scott Belsky describes the objective:

“Just one example: At Behance, in the sign-up process for our service, we used to ask new Behance members to select their top three creative fields. New users took an average of 120 seconds to browse the list and select their top fields. We lost around 10% of new members at this particular step in the sign-up process. And so, we removed it from the sign-up process and resolved ourselves to capture this information later on during active use of the website. As a result, sign-ups went up. This is true for every online service or store. In the first 15 seconds, your visitors are lazy in the sense that they have no extra time to invest in something they don’t know. They are vain in that they want to look good quickly using your product. And they’re selfish in that, despite the big picture potential and purpose of what your service.”

  1. Critical mass magic moment–  a realization of core product value that is strong enough to ensure that customers are retained over the long term. To determine whether retention has reached a critical mass. A Bain study concluded:

“Depending on which study you believe, and what industry you’re in, acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one. It makes sense: you don’t have to spend time and resources going out and finding a new client — you just have to keep the one you have happy. If you’re not convinced that retaining customers is so valuable, consider research done by Frederick Reichheld of Bain & Company (the inventor of the net promoter score) that shows increasing customer retention rates by 5% increases profits by 25% to 95%.”

  1. Reinforcing magic moments–  customers experiencing “core product value” reinforcement while experiencing the product. An example of this approach happens when Facebook sends you a message that someone has tagged you in a photo. The intent is to harness your curiosity to drive you back to core product value. For Facebook, reinforcing magic moments include adding a friend, liking or sharing a post, or updating your status within 24 hours of downloading the mobile app. Chamath Palihapitiya believes you can create loops that expose that core product value over and over again. he says:  “You have to work backwards from ‘what is the thing that people are here to do?’ ‘What is the A-ha moment that they want?” Schultz cautions:There’s a really fine line between removing friction and duping users. Tricking users hurts users. Adding friction hurts users.”
  2. Reactivation magic moments–  experiences that cause a customer to returns to a service after being inactive. “We missed you” emails are intended to trigger this type of Magic Moment.

How do you discover magic moments for your service? The objective is to look for correlations between usage, demographics and other behavior and retention. Examples of magic moments discovered by some businesses include adding seven friends in ten days or sending several thousand messages.

  1. “Virtuous loops are the flywheels that covert your users’ engagement into fuel to power your company forward. The strongest virtual loop is a network effect. Virtuous loops are really hard to create. Most products don’t have them.”

Virtuous circles and vicious circles are processes which can reinforce themselves through a feedback loop. Virtuous circles produce feedback that results in an increasingly positive outcome and vicious circles the inverse of that. One famous picture of a flywheel at work that you see a lot is this one below which describes one aspect of Amazon’s business:

AMZN loop

  1. “To get the flywheel spinning for a marketplace, you can’t sit in front of your computer and code. You need to pound the pavement more often than not and do things ‘that don’t scale’ to get the liquidity to help you start scaling.” 

Y Combinator co-founder Paul Graham describes what a business must do to start a business from a standing start better that just about anyone I have seen: 

The most common unscalable thing founders have to do at the start is to recruit users manually. Nearly all startups have to. You can’t wait for users to come to you. You have to go out and get them. A good metaphor would be the cranks that car engines had before they got electric starters. Once the engine was going, it would keep going, but there was a separate and laborious process to get it going.”

There is a big difference between doing things that don’t scale and being in a business that won’t eventually scale. Scalability is an important goal for any business but almost always in the beginning efforts  will be require that don’t scale well.  CEOs will go on sales calls, products will be created by hand, and many manual processes will be used at first. This info-graphic captures some non-scalable approaches that startups have used to bootstrap their flywheels past the cold stat problem.



  1. In non-transactional products, real value will be created when you create accruing benefits.  A product has accruing benefits if a user would say the more I use the product, the better it gets.’” 

Tavel uses examples from her experience at Pinterest to make this point:


10. “Mounting loss happens as a product becomes something you depend on, part of your identity, or a product in which you’ve accrued value of some sort (e.g., a following). ‘I’d have a lot to lose if I left this product’ is the claim to test.”


11. “The clearest way to understand a company’s engagement is to look at cohorts: number of weekly users completing the core action and percentage of weekly active users completing the action.”

There are an endless number of ways you can think about cohorts. One simple approach to illustrate what can be done is to look at a cohort’s behavior graphically: the number of days from acquisition is on the x axis, on the y axis is the percent of people who are still monthly active. With each day that passes some members of the cohort will stop using the service but the critical mass objective is to get the curve to “flat line” in a way that asymptotes with the x axis. What causes the line to stop dropping is often the network effects of more people being on the network creating a critical mass of value for the customer.

A retention curve that does not flatten and instead drops to zero may be caused by a product market fit problem or it may be the nature of the product (e.g. some video games). The single most important factor that drives growth is retention.


12. “Blogging is venture capital’s freemium model.”

There are at least three reasons that venture capitalist’s write for public consumption.

  1. It helps the writer think things through and find new solutions and ways to communicate ideas.
  2. It is way to give back- teaching is a way of giving back.
  3. It is way to use content marketing to source new deal flow.

It’s always nice when you get three things for the same amount of effort. It is even better if you can do well financially by doing something good for other people. Regardless of whether someone is first starting out or even if they are a big success writing is a way to turn thinking, words and effort into a substitute for capital. Content marketing is both more capital efficient and produces better results than traditional marketing. 

Writing is my way of giving back. Revenue is negative. It makes me feel good though, which is highly underrated.


The Hierarchy of Engagement, expanded https://medium.com/@sarahtavel/the-hierarchy-of-engagement-expanded-648329d60804

How To Create A Sticky Product Like Facebook and Evernote https://www.linkedin.com/pulse/accruing-benefits-mounting-loss-sarah-tavel 

How to build an enduring, multi-billion dollar business https://medium.com/@sarahtavel/how-to-build-an-enduring-multi-billion-dollar-business-hint-create-a-10x-product-recast-3527df2b8fcb 

Engagement Hierarchy: Core Actions  https://medium.com/@sarahtavel/engagement-hierarchy-core-actions-dd4f72042100 

Venture Capital’s Freemium Model http://www.adventurista.com/2009_11_01_archive.html 

Growth Hackers AMA https://growthhackers.com/amas/live-jun-14-ama-with-sarah-tavel-vc-at-greylock-partners

Lesson from Scaling Pinterest https://medium.com/@sarahtavel/five-more-lessons-from-scaling-pinterest-9c10fe97d325

The Mitochondria of Startups https://www.linkedin.com/pulse/mitochondria-startups-sarah-tavel

20 Minute VC https://www.producthunt.com/posts/the-twenty-minute-vc-sarah-tavel-partner-greylock-partners

Graham- Do Things that Don’t Scale http://paulgraham.com/ds.html

Bain:  https://hbr.org/2014/10/the-value-of-keeping-the-right-customers

Belsky: https://medium.com/positiveslope/the-first-15-seconds-9590d7dabc

Alex Schultz: https://venturebeat.com/2014/08/06/facebook-growth-chief-you-lose-users-if-you-try-to-trick-them/

Quora:  https://www.quora.com/Growth-Hacking/Growth-Hacking-How-do-you-find-insights-like-Facebooks-7-friends-in-10-days-to-grow-your-product-faster-1?utm_content=buffer2afcc&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer#!n=12

A Dozen Lessons about Money and Investing from Kendrick Lamar (K-Dot)


  1. “What I’ve learned is the best thing I can do with the position I’m in, and the places I’ve gone, is sharing this same information and giving you a step by step guide on the do’s and don’ts of what I’ve gained from talking to Jay Z and these different moguls in the business — whether talking about business, or just life. I can’t keep all of the information to myself, I have to share it. Within doing that, it’s giving me just as much as it’s giving them, and that’s worth more than any dollar amount.” Forbes Interview.

K-Dot is making the same point Charlie Munger was trying to convey when he said: “The best thing one human being can do for another human being is to help them know more.” Trying to figure out everything in life by yourself from first principles not only does not scale well, but it involves lots of unnecessary pain. Life gets easier when you learn vicariously from the mistakes of other people. You can do this by watching other people’s behavior or by reading about it. Munger advises: “I believe in the discipline of mastering the best that other people have figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.” K-Dot is also saying that an approach to life that includes teaching other people inevitably means you get back more than you give (e.g., the process of teaching anything makes you learn the topic even better). The other factor involved is what Munger has referred to as “penance.” Mohammad Ali  made a similar point once when he said: “Service to others is the rent you pay for your room here on earth.” Giving back to other people is not just beneficial because you learn more, it is by itself a moral imperative. 

  1. “If you get your first big check and you cop a chain before you buy a house. You’re a vanity slave.” Vanity Slave.

K-Dot is cautioning people to stay grounded about priorities, especially when fortune suddenly arrives. Vanity, greed and ego can cause people to make bad choices. He makes his point with an example: copping a chain before you take care of other basic needs is vanity. Concern about the adverse impact of vanity is not a new idea. For example, Jane Austen wrote: “Vanity and pride are different things, though the words are often used synonymously. A person may be proud without being vain. Pride relates more to our opinion of ourselves, vanity to what we would have others think of us.” I would rather put a viper down my shirt than let someone else determine whether I am happy. Getting control of your desire for ever more stuff is mentally healthy. Seneca once said: “It is not the man who has little, but he who desires more, that is poor.” In contrast, being ever covetous despite gains in wealth only increases the probability that you will be miserable. Can you be wealthy and enjoy that but not tie your happiness to maintaining that wealth? Seneca believed: “For many men, the acquisition of wealth does not end their troubles, it only changes them and that “Wealth is the slave of a wise man. The master of a fool.” The best thing you can acquire with money is independence. Munger puts it this way:  “Like Warren, I has a considerable passion to get rich, not because I wanted Ferarris.  I wanted the independence. I desperately wanted it.”

  1. “A dependable savings and you’ll retire with money in your account.” The Lonely Island.

People involved in the entertainment and sports industries often have incomes that are front loaded in the early years of their career. Yes, they can work at another job later in life, but that work may not pay nearly as much as they earned in their prime years. K-Dot is saying that adopting an approach which paces consumption over a person’s entire life is wise. The best way to increase your wealth is to save more of your income. Morgan Housel puts it this way:

“Building wealth has little to do with your income or investment returns, and lots to do with your savings rate. Fortunes can be blown as fast as they’re earned – and often are – while others with modest incomes can build up a fortune over time. Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income but have no chance without a high savings rate, it’s clear which one matters more.”

K-Dot is saying that people should think more about their retirement savings in particular. As just one example of what can happen if you do not save,  among senior beneficiaries in the US, the median Social Security benefit is $14,400. Trying to live on just that income given health care and other expenses is a terrible idea if you can avoid it. Here is some data on that point:

 soc sec

  1. “Take no chances, stop freelancin’; Invest in your future, don’t dilute your finances.” The Lonely Island.

While saving money is the most important step one can take to increase wealth and security, K-Dot is saying that investing is important too. The statistics on where many people stand on people’s financial preparation for retirement are dire. For example, “~1/2 of families have no retirement account savings at all. Median values are low for all age groups.” http://www.epi.org/publication/retirement-in-america/#5 …


  1.  “401K, make sure it’s low risk.” The Lonely Island. “At 27, my biggest fear was losin’ it all.” Fear.

K-Dot is talking about the need for investors to control risk, especially when it comes to retirement funds in something like a 401K. Before a person can control risk it is necessary to define it. I particularly like the definition of risk adopted by Howard Marks: “In thinking about risk, we want to identify the thing that investors worry about and thus demand compensation for bearing. I don’t think most investors fear volatility. In fact, I’ve never heard anyone say, ‘The prospective return isn’t high enough to warrant bearing all that volatility.’ What they fear is the possibility of permanent loss.” Warren Buffett recently told a story about someone worrying about having enough money in their retirement that is both relevant and amusing:

“I had an Aunt Katie here in Omaha… She worked really hard all her life, lived in a house she paid $8,000 for… Because she was in Berkshire she ended up — she lived to 97 — she ended up with a few hundred million and she would write me a letter every four, five months and she said, ‘Dear Warren, I hate to bother you, but am I going to run out of money?’ And I would write her back and I’d say, ‘Dear Katie, It’s a good question because if you live 986 years, you’re going to run out of money. And then about four or five months later, she would write me the same letter again. There’s no way in the world if you’ve got plenty of money that it should become a minus in your life.”

  1.   “Got real estate over there and hustle over here.” Enjoy.

K-Dot is saying that he will not lose focus on the hustle aspects of his life just because he has made real estate or other investments. Nothing generates wealth more reliably that a strong work ethic, a regular income combined with talent and a willingness to save and invest.  My view on actively investing real estate is heavily influenced by the advice my grandfather (a real estate developer) gave to my father the doctor. He said that my dad should leave active real estate investing to professionals. If my father desired exposure to real estate my grandfather suggested that he do so via a fund. He said that it was possible for my dad to become an expert active real estate investor but only if he treated it as a second career, found an area to specialize in and was passionate about it.  Here’s Munger on real estate:

“The trouble with real estate is that everybody else understands it.  And the people who you are dealing with and competing with, they’ve specialized in a little twelve blocks or a little industry.  They know more about the industry than you do.  So you’ve got a lot of bull-shitters and liars and brokers.  So it’s not a bit easy.  It’s not a bit easy.  You don’t even see the good offerings in real estate.  It’s not an easy game to play from a beginner’s point of view.  Real estate.  Whereas with stocks, you’re equal with everybody.  If you’re smart.  In real estate, you don’t even see the opportunities when you’re a young person starting out.  They go to others.  The stock market’s always open.  It’s (like) venture capital.  Sequoia sees the good stuff.  You can open an office, “Joe Schmoe Venture Capitalists: Start-ups come to me!”  You’d starve to death.  You got to figure out what your competitive position is in what you’re choosing.  Real estate has a lot of difficulties.}

  1. “When you’re in this situation with all the lights on you, you’re going to get a lot of offers thrown at you, but if it’s not something that you see has longevity in it, you have to pass it up.” 

K-Dot knows that there are no called strikes in investing. Patience is essential as is waiting for the right offer. Opportunity cost is a huge filter in life. Charlie Munger looks at his investing decisions in this way: “We’re guessing at our future opportunity cost. Warren is guessing that he’ll have the opportunity to put capital out at high rates of return, so he’s not willing to put it out at less than 10% now. But if we knew interest rates would stay at 1%, we’d change. Our hurdles reflect our estimate of future opportunity costs. Warren is scanning the world trying to get his opportunity cost as high as he can so that his individual decisions are better.”

  1. “On the business end, it just shows me: always be critical and smart about the moves you make.”

K-Dot is pointing out that it is important to think critically about your decisions since we all have a range of dysfunctional biases that can tend to result in unwise decisions. Everyone makes mistakes. Thinking hard about how you might have made a mistake due to an emotional or dysfunctional factor can pay big dividends. People who can put aside their ego-based defenses and embrace a great idea that someone else discovered tend to get better results in life. “Not invented here” too often means “no benefits here.” Charlie Munger said exactly that the 2017 Berkshire shareholders meeting: “You have to have a habit of reexamining your old ideas from time to time since without that, you can’t see it when they become wrong. A year in which you do not change your mind about something important is a wasted year in his view.

  1. “So just to get a dollar, will I sell my soul? I look the Devil in the eye and tell him, hell no.” Compton State of Mind.

In the end you can make more money from behavior that meets a high ethical standard. Not only it is the right thing to do morally, it is the right thing to do from a profit standpoint. Charlie Munger has said: We don’t claim to have perfect morals, but at least we have a huge area of things that, while legal, are beneath us. We won’t do them.  Currently, there’s a culture in America that says that anything that won’t send you to prison is OK.” What can be more satisfying than doing well financially while at the same time making a positive contribution to society in a way that is highly ethical? Munger tells a story about how he made a fantastic investment by wading into an area where the other people involved are ethically challenged:

“I soon realized that under the peculiar rules of an idiot civilization, the only people who were going to bid for these oil royalties were oil royalty brokers who were a scroungy, dishonorable, cheap bunch of bastards. I realized that none of them would ever bid a fair price.”

  1. “All money ain’t good money.”

K-Dot is channeling a point Dorothy Parker famously made when she said: “If you want to know what God thinks of money, just look at the people he gave it to.” It is that simple.  Munger puts it this way:

“Ben Franklin said: ‘I’m not moral because it’s the right thing to do – but because it’s the best policy.’” “We  knew early how advantageous it would be to get a reputation for doing the right thing and it’s worked out well for us. My friend Peter Kaufman, said ‘if the rascals really knew how well honor worked they would come to it.’ People make contracts with Berkshire all the time because they trust us to behave well where we have the power and they don’t. There is an old expression on this subject, which is really an expression on moral theory: ‘How nice it is to have a tyrant’s strength and how wrong it is to use it like a tyrant.’ It’s such a simple idea, but it’s a correct idea.” “You’ll make more money in the end with good ethics than bad. Even though there are some people who do very well, like Marc Rich–who plainly has never had any decent ethics, or seldom anyway. But in the end, Warren Buffett has done better than Marc Rich–in money–not just in reputation.”

  1. “The best thing I’ve learned is that it’s not about getting a certain amount of dollars and spreading it all out. That process is meant to crumble. That process is meant to bring envy and hate, because once you stop spreading it, or once you stop getting it, you realize there’s just a lot of evil behind it.”

No matter how rich someone like K-Dot may become there are limits to what can be given away. Problems are inevitably created when too much money is given away to a friend or a posse of friends. K-Dot is saying that people who were on the receiving end of gifts have a tendency to get angry if you stop since they feel they have lost something. These angry feelings are heightened due to loss aversion.  Being generous works better when you make sure that the beneficiary is not acquiring an expectation that the gifts will be ongoing. Being generous of charitably minded is not always simple. This is K-Dot in “How Much a Dollar Cost” from the album “To Pimp a Butterfly”:

“…Walked out the gas station
A homeless man with a silly tan complexion
Asked me for ten grand
Stressin’ about dry land
Deep water, powder blue skies that crack open
A piece of crack that he wanted, I knew he was smokin’
He begged and pleaded
Asked me to feed him twice, I didn’t believe it
Told him, “Beat it”
Contributin’ money just for his pipe, I couldn’t see it
He said, “My son, temptation is one thing that I’ve defeated
Listen to me, I want a single bill from you
Nothin’ less, nothin’ more
I told him I ain’t have it and closed my door
Tell me how much a dollar cost

It’s more to feed your mind
Water, sun and love, the one you love
All you need, the air you breathe

He’s starin’ at me in disbelief
My temper is buildin’, he’s starin’ at me, I grab my key
He’s starin’ at me, I started the car and tried to leave
And somethin’ told me to keep it in park until I could see
A reason why he was mad at a stranger like I was supposed to save him…”

  1. “It’s one thing we’ll keep coming back to — remove the ego. I promise you, that’s the most valuable thing I’ve learned.”

Morgan Housel puts it this way:one of the most powerful ways to increase your savings isn’t to raise your income, but your humility.” Morgan knows that ego can easily get in the way of making sound decisions. As I noted in my recent blog post on Ray Dalio, he believes: People are so attached to being right, and yet the tragedy is it could be so easy to find out how you’re wrong.” If you can learn to take ego out of your decision making  you will make fewer mistakes. Buying things and making investments that stroke your ego is short sighted. People who learn to save and invest have better choices in life. Few things are worse in life than having no choices. Munger with a closing thought:

“Then there’s the chasing of the investment return rabbit. What if you had an investment that you were confident would return 12% per annum. A lot of you wouldn’t like that — especially if you’ve done better– but many would say, ‘I don’t care if someone else makes money faster.’ The idea of caring that someone is making money faster is one of the deadly sins. Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on that trolley?”











Morgan Housel:  http://www.collaborativefund.com/blog/let-me-convince-you-to-save-money/

Nassim Taleb: http://www.econtalk.org/archives/2012/01/taleb_on_antifr.html

The Dot-Com Boom and Bust


“Most of the entrepreneurs today weren’t around in ’99. They have no muscle memory of it whatsoever.” Bill Gurley (September 2016)

Unlike the entrepreneurs Bill Gurley is talking about, I have a lot of muscle memory that resulted from the Internet bubble. There is no way you can fully convey in words the experience being in the lead car as an investor in that roller coaster. Looking at the cycle after the fact is nothing like looking ahead and not knowing what will happen next. The experience still impacts the way I think and act. It was a heck of a lot of fun in some ways. If you can’t learn from an experience like we had in the markets during roller-coaster ride that was the Dot-Com phenomenon, you were not paying attention. Good judgment comes from experience and often that experience comes from bad judgment. Most of the bad judgment associated with the Dot-Com era was observed but some of it was mistakes I made all by myself or as part of a herd. It is hard to describe how strong the feeling of FOMO was at the time. People were terrified of missing out on the upside and loss aversion and paper gains made them reluctant to act to cushion the downside.

Every story must have a starting point. The best time to begin this tale is probably 1993 when the business environment first started to change in way that would develop into a bubble. Changes that we would look back at later and say “that was crazy” did not happen in a huge way at first. The initial buildup was gradual and steady at the outset. But by 1994 the parties started getting better, the tchotchkes more lavish and paper wealth created at an impressive pace. Everyone was a frog in a pot of boiling water but they mostly did not feel it. By 1995 having in the Rolling Stones or The Eagles play at a private party hosted by a bigwig was becoming normalized in some circles in certain geographies.

One aspect of the abnormality of the period was the rapid jump in the number of IPOs. This chart shows the “IPO pig coming through the snake” in the mid to late 1990s. It also puts the current IPO market into perspective.

Not Many IPOs

Venture backed IPOs looked like this chart below. One VC quoted on Bloomberg recently predicted 30-35 IPOs in 2017. As a benchmark for comparison, there were 21 tech IPOs in 2016, 23 in 15 and 55 in 2014 and 84 in 2013.


The amount of paper wealth that was being created did not start to accelerate to bonkers levels until ~1996. While 1996 had the most IPOs 1999 was the pivotal year in terms of the valuations and amounts of money raised:

money raised

One aspect of the IPO craziness of the Dot-Com era was the first day pop. Getting an allocation of “friends and family” shares for an IPO seemed to some people like a guaranteed way to make a profit in 1999. Like most bubble phenomenon that first day pop approach worked until it suddenly didn’t.

While the madness was going on there were people who predicted that a bubble was forming and that it would end badly; some of these people took their fund to $0 by shorting stocks too early. That experience illustrated how being early in making a prediction is indistinguishable from being wrong. By late 1999 I remember thinking “everyone can’t really be this rich. Or can they?” Some people became fabulously rich on paper in just months and the impact of that was that envy and jealousy which caused other people to lose their tie to reality. The environment was literally nuts. FOMO made people do things that in retrospect seem insane, but at the time seemed reasonable. Here’s a recap:

“Initial public offerings raised more than $69 billion in 1999, 39 percent more than 1996, the second-biggest year, according to Thomson Financial Securities Data. More eye-popping, however, may be the year’s record first-day gains. VA Linux jumped a record 733 percent in its first day of trading in early December. One hundred and seventeen, or 23 percent, of the year’s IPOs soared more than 100 percent in the first day of trading, according to WorldFinanceNet.com. The average first-day gains of 68 percent this year trounced last year’s average rise of 23 percent. The year registered nine of the top 10 first-day IPO gains of all-time, according to IPO.com.”


What happened to VA Linux?

changed it

Geeknet now sells classic items like:


A Salon article in April of 2000 article painted a picture of the party scene in the technology world that was produced by too much cash chasing too little value. What is most notable perhaps about the article is that it appeared after the bubble had popped. The party scene was operating on momentum still, but about to come to a calamitous halt.

“Jessica Crolick downs her free drink, grabs a black fleece jacket from the table and darts out of the dot-com party at the San Francisco Museum of Modern Art. She hops into a van with four strangers, who are on their way to another dot-com bash across town. The conversation moves from work to apartments, but conspicuously absent from the chatter is Digital Island the digital content delivery company that spent over $50,000 for food, drink and fleece to fete its new logo and announce a partnership with Apple. In fact, by the time Crolick and her posse reach the second party — a tropical-themed and more raucous affair hosted by Beenz an online currency company — few remember the first company’s name, and no one knows or cares what either company does. Dot-com valuations may have withered, but the enthusiasm for extravagant dot-com parties hasn’t, and party budgets show no signs of being trimmed. In any given week, technology companies throw 15 to 20 parties in the San Francisco Bay Area. On average, each costs $30,000 to $50,000, according to party planners and venue owners, although the $250,000 blowout is hardly rare. In March, for example, Salesforce an online sales automation service, and iCast which offers streaming media tools and content, each ran up tabs greater than $200,000, entertaining more than 1,000 guests each…. Marx, the president of Acteva — which brought 2,000 people to Treasure Island in December for a $200,000 party to announce its new name — agrees. More money, more people and more extravagant ideas are definitely the way to go. It’s no longer enough to just “get a few hundred people together and give them a drink,” he says, glancing around at the paltry WiredPlanet party.”

Clearly an abnormal number of IPOs and unprofitable companies doing an IPO was happening in 1999.

dist ipo

The level of schadenfreude and morbid curiosity was also unprecedented.  The roll call of craziness is long:







Blue Mountain











A more complete list of companies that went public during the DotCom era can be seen in this document entitled: “A Prelude to the Dot-Com Bust” http://online.wsj.com/public/resources/documents/CovOriginal.pdf  What is interesting is that a few companies like Amazon are on this list so some went on to bigger things. It would be interesting if the math revealed yet another power law.

One thing that is hard to describe is how quick things got really ugly. Some people froze like a deer in headlights. Other people acted and salvaged some value. Every day in the market even during less volatile times you are in the lead car of the a roller-coaster and can’t see anything ahead, but because the up and down motion were so very steep in the Dot-Com era the experience was particularly unnerving.

“On March 10, 2000 the combined values of stocks on the NASDAQ was at $6.71 trillion; the crash began March 11. By March 30, the NASDAQ was valued at $6.02 trillion. On April 6, 2000, it was $5.78 trillion.”

By the start of 2000 the investing and business environments weren’t quite as nutty as was the case in 1999 but times were still relatively good. But things went downhill fast that year:

“Unlike 1999, the new issues class of 2000 featured a lot of big losers,” says Richard Peterson, chief market strategist for Thomson Financial Securities Data. Peterson’s firm reports that of the 452 stocks that went public last year, 284, or 63%, trade below their offering prices and 68% are down from the first trading day’s close.

What caused the bubble to pop? In March of 2000 Barron’s carried a story that contained some sobering numbers that some people believe was pivotal in triggering the correction. I am of the views that what triggered the correction was a lack of cash. Was the Barron’s article the last straw on the camel’s back? It is impossible to prove but some people think so. I remember reading the Barron’s story but since I was seeing many Internet companies with little cash on hand the article’s conclusion was not really news. There were telecom companies on that list referred to in the Barron’s article but the telecom world did not see a collapse until early 2001. There were also companies on that list http://online.wsj.com/public/resources/documents/CovOriginal.pdf  like Amazon, Ticketmaster, McAfee and Priceline that survived. In any event, regardless of whether you think the article as the cause of the change, the Barron’s story was very timely and correct:

“An exclusive study conducted for Barron’s by the Internet stock evaluation firm Pegasus Research International indicates that at least 51 ‘Net firms will burn through their cash within the next 12 months. This amounts to a quarter ofthe 207 companies included in our study. Among the outfits likely to run out of funds soon are CDNow, Secure Computing, drkoop, Medscape, Infonautics, Intraware and Peapod. To assess the Internet sector’s financial position, Pegasus assumed that the firms in the study would continue booking revenues and expenses at the same rate they did in last year’s fourth quarter. While this method cannot predict the future precisely, it helps answer a question that has been nagging many stock-market analysts: When will the crowded Internet industry begin to be winnowed? The ramifications are far-reaching. To begin with, America’s 371 publicly traded Internet companies have grown to the point that they are collectively valued at $1.3 trillion, which amounts to about 8% of the entire U.S. stock market.”

These charts of the NASDAQ tell a graphical story about what happened and when. It is important to note that it went down as fast as it went up. One company as I recall ended up stuck with $1B in FPGA chips sitting in warehouses. Everything changed. Quickly. The telecom bubble took at bit longer to correct, but that is another story.


real price

By December 2000:

“What a difference a year makes. The Nasdaq sank. Stock tips have been replaced with talk of recession. Many pioneering dot-coms are out of business or barely surviving. The Dow Jones Internet Index, made up of dot-com blue chips, is down more than 72 percent since March. Online retailers Priceline and eToys, former Wall Street darlings, have seen their stock prices fall more than 99 percent from their highs.”

Philip J. “Pud” Kaplan’s operated a web site that published stories, internal memos and leaked documents of failed startups that still can be found at http://web.archive.org/web/20011201061308/http://fuckedcompany.com/ You can change the date to simulate what it was like to look at the dead pool every day. Posts looked like this:


In terms of my own decisions related to the end of the bubble, the summer of 1999 was when I hedged the market by selling some shares and buying some puts as a proxy hedge after reading a lot of material on the views of Buffett and Munger. I decided that year I would put away enough money in safe bets so I could live comfortably regardless of what happened. There are times in life when the world will not make much sense, at least to you. As an example, the Internet bubble of 1999-2001 was a time like that. The share sales and proxy hedging ensured that I would not be a burden to anyone in my retirement and that my children would be able to go to college with my financial assistance. I did leave a lot of money on the table by not selling everything, but my “barbell portfolio” did what it was designed to do. My decisions were not perfect but they were sound.


Little Risk (cash and safe bonds)                                   Lots of Risk (startups and tech stocks)

So you may ask, are we in a bubble now? Well we can say that things are very different. The situation today is not the same it was in March 2000. The Economist writes;

“the base of today’s success is broader. In 2000 some 400m people around the world had access to the internet; by the end of 2015 3.2 billion people will. And the internet reaches into these people’s lives in many more ways than it could 15 years ago. ‘Technology is no longer a vertical industry, as it’s been understood by everyone for four decades,’ says John Battelle, a journalist and entrepreneur who launched the Industry Standard, a magazine which reported on the dotcom boom before itself going bankrupt in 2001. ‘Technology is now a horizontal, enabling force throughout the whole economy.’”

I fall in the camp of people who say that we do not have a valuation bubble today but rather a risk bubble. The big lesson to take away from the 2000 bust is that the cash spigot can close really fast. One day you can raise hundreds of millions of dollars and the next day you can’t raise five cents. From the end of the Internet bubble into 2003 cash was indeed king. I remember Greg Maffei telling me that when he was still Microsoft’s CFO as early as 1998. Risk and valuation are not the same. There are many thing that are different now a few of which are noted in this article http://www.valuewalk.com/2017/05/nasdaq-6000-now-infographic/  by Burt White, Chief Investment Officer for LPL Financial

  • Price to Earnings Ratio (PE). The PE ratio for the Nasdaq in March 2000 on current year estimates was 107, versus 23 today. Even using the consensus forward (next 12 months) earnings estimates, the PE stood at 75 back in March 2000 compared with 22 today. The cash flow multiples also tell the same story: near 100 then compared with mid-20s now.
  • Price-to-book ratio. Valuation measures based on the value of company assets minus liabilities, or book value, also reveal a much more expensive Nasdaq in 2000 versus now. The lack of assets supporting valuations was a big problem during the dotcom bubble (page views, eyeballs, and clicks were not enough). The price-to-book ratio at the peak in March 2000 was over 7, compared with 3.9 now (as of April 28, 2017). And those assets today produce far more profits.
  • Market trajectory. Another way to compare today’s Nasdaq to the 2000 version is looking at the steepness of the two rallies, which reveals a dramatic difference. The Nasdaq has gained 22% over the past two years, compared to its 189% surge during the two years leading up to the March 10, 2000 peak. Clearly today’s technology rally lacks the parabolic nature of the dotcom bubble.

Good things can come from bad experience. Many ideas that failed then are succeeding now. Capitalism requires failure and it is an understatement to say that a lot of things failed as a result of the Internet bubble. One good example is described here by CB Insights:  “In 1996, Louis Borders, founder of Borders bookstores (a famous casualty of the modern e-commerce era), had the crazy idea to let people order their groceries online and have them delivered to their homes. To achieve this, Louis Borders raised $396 million through an IPO in late 1999. After several years of sustained losses, though, the company finally crashed in 2001. But Borders’ dream of people never having to leave their homes for groceries has since been adopted by Amazon.” I know several people who loved WebVan as customers and they mourned its demise. But they could not cover their costs (venture philanthropy does not scale) and ran out of cash.



1999: http://money.cnn.com/1999/12/27/investing/century_ipos/

2000: https://www.forbes.com/2001/01/03/0103sf.html

Mattermark: https://mattermark.com/technology-company-ipos-then-now/

10 years Gone: https://www.cnet.com/news/10-years-gone-the-va-linux-systems-ipo/

A Dozen Lessons on Finance and Business from Ambrose Bierce

Ambrose Bierce started his career as a printer’s devil (apprentice) at an Indiana, paper after he completed about a year in high school. In 1861 he enlisted in the 9th Indiana Volunteers and fought in a number of American Civil War battles, including Shiloh and Chickamauga. He was seriously wounded in the Battle of Kennessaw Mountain in 1864 and served until January 1865.  After the war he worked as an editor, journalist, and short story writer mostly in San Francisco. What would become the book “The Devil’s Dictionary was begun in a weekly paper in 1881, and was continued in a desultory way at long intervals until 1906.  In that year a large part of it was published in covers with the title The Cynic’s Word Book, a name which the author had not the power to reject or happiness to approve.”

Janson Zweig has written a wonderful book entitled The Devil’s Financial Dictionary in the style of Bierce that is both entertaining and educational. My approach in this blog post, as is customary, is to supply something in support of the original text, which in this case a joke rather than the usual commentary.

  1. “OWE, v. To have (and to hold) a debt. The word formerly signified not indebtedness, but possession it meant ‘own,’ and in the minds of debtors there is still a good deal of confusion between assets and liabilities.” 

A frog goes into the bank and asks the teller for a business loan. The teller tells the frog to see Mr. Paddywack, the business loan officer. Mr. Paddywack looks at the frog and says, “What do you have for collateral? The frog pulls out of his pocket a solid silver elephant. Mr. Paddywack looks at the elephant and says, “I don’t know. I’m going to have to ask Mr. Larson, the bank manager to approve this business loan.” He goes into Mr. Larson’s office and comes back. Two minutes later, Mr. Larson comes out with the elephant and says, “It’s a knick-knack Paddywack, give the frog a loan!”

  1. “COMMERCE, n. A kind of transaction in which A plunders from B the goods of C, and for compensation B picks the pocket of D of money belonging to E.” 

A man had just been hired as the new CEO of a large corporation. The CEO who was stepping down met with him privately and presented him with three numbered envelopes. “Open these if you run up against a problem you don’t think you can solve,” he said. Well, things went along pretty smoothly at first, but six months later, sales took a downward turn and he was really catching a lot of heat. About at his wits end, he remembered the envelopes. He went to his drawer and took out the first envelope. The message read, “Blame your predecessor.” The new CEO called a press conference and tactfully laid the blame at the feet of the previous CEO. Satisfied with his comments, the press — and Wall Street — responded positively, sales began to pick up and the problem was soon behind him. About a year later, the company was again experiencing a dip in sales, combined with serious product problems. Having learnt from his previous experience, the CEO opened the second envelope. The message read, “Reorganize.” This he did, and the company rebounded. After several consecutive profitable quarters, the company once again fell on difficult times. The CEO went to his office, closed the door and opened the third envelope. The message said, “Prepare three envelopes.”

  1. “FINANCE, n. The art or science of managing revenues and resources for the best advantage of the manager. The pronunciation of this word with the i long and the accent on the first syllable is one of America’s most precious discoveries and possessions.”

How many stockbrokers does it take to screw in a lightbulb? Two. One to hire a lightbulb installer and another to charge you a fee of 1% of your assets each year and a 5% sales load.

  1. “MAMMON, n.: The god of the world’s leading religion.” (can be defined as money, material wealth, or any entity that promises wealth.”

Two friends met in the street. One looked sad and almost on the verge of tears. The other man said, “Hey my friend, how come you look like the whole world has caved in?”  The sad fellow said, “Let me tell you. Three weeks ago, an uncle died and left me $50,000.” “That’s not bad at all…!” “Hold on, I’m just getting started. Two weeks ago, a cousin I never knew died and left me $95,000.” “Well, that’s great! I’d like that.” “Last week, my grandfather passed away. I inherited almost $1 million.” “So why are so glum?” “This week – nothing!”

  1. “PROPERTY, n. Any material thing, having no particular value, that may be held by A against the cupidity of B. Whatever gratifies the passion for possession in one and disappoints it in all others.” 

A man opened the door of his BMW, when suddenly a car came along and hit the door, ripping it off completely. When the police arrived at the scene, the lawyer was complaining bitterly about the damage to his precious BMW. “Officer, look what they’ve done to my Beeeemer!!!”, he whined. “You are so materialistic. You make me sick!!!” said  the officer, “You’re so worried about your stupid BMW, that you didn’t even notice that your left arm was ripped off!” “Oh my gaaad….”, replied the man, finally noticing the bloody left shoulder where his arm once was, “Where’s my Rolex? ”

  1. “MONEY, n. A blessing that is of no advantage to us excepting when we part with it. An evidence of culture and a passport to polite society. Supportable property.” 

A thief stuck a pistol in a man’s ribs and said, “Give me your money.” The man replied, “You cannot do this — I’m a United States congressman!”  The thief said, “In that case, give me my money!”

  1. “CLAIRVOYANT, n.: A person who has the power of seeing that which is invisible to her patron – namely, that he is a blockhead.”

While studying the occult, a teacher asked one of the boys in her class, “Can people predict the future with cards?” His response was, “My mother can.” The teacher replied, “Really?” The young boy was quick to explain, “Yes, she takes one look at my report card and tells me what will happen when my father gets home.”

  1. “BRAIN, n. An apparatus with which we think that we think.” 

An alien walked into a shop and told the owner that he came from Mars and wanted to buy a brain for research. ”How much is this one?” he asked. ”That one is a monkey brain, and it’s $20,” the owner explained. ”How much is that one?” the alien asked. “That one is an engineer’s brain, and it’s $100,” the owner replied. ”And how much is that one?” the alien asked. ”That one is a politician’s and it is $500” the owner explained. ”Why is the politician’s brain so expensive?” the alien asked. The owner answered, ”Well, it’s hardly been used!”

  1. “PLAN, v.t. To bother about the best method of accomplishing an accidental result.”

A girl has brought her fiancé home for dinner. After dinner, the fiancé and the girl’s father go into the study for a man to man talk. “So, what are you doing right now?” asks the father. “I am a theology scholar,” replies the fiancé. “Do you have any plans of employment?” “I will study and God will provide.” “What about the children?” asks the man. “God will provide.” “And your house and car?” “Again, God will provide,” says the fiancé. After the talk, the girl’s mother asks the father, “So what did you two talk about?” The man replies, “He has no plans of employment, but on the other hand, he thinks I’m God.”

  1. “RESPONSIBILITY, n. A detachable burden easily shifted to the shoulders of God, Fate, Fortune, Luck or one’s neighbor. In the days of astrology it was customary to unload it upon a star.”

Joe was having a tough time finding a job what with the current economic problems. He couldn’t even get an interview. Finally, he secured an interview and needless to say, he was trying his best to impress. The interviewer said, “In this job Joe, we need someone who is responsible.” “I’m the one you want,” Joe replied. “At my last job every time anything went wrong, they said I was responsible.”

11.“CONSULT, v.i. To seek another’s disapproval of a course already decided on.”

A shepherd was herding his flock in a remote pasture when suddenly a brand-new BMW advanced out of the dust cloud towards him. The driver, a young man in a Brioni suit, Gucci shoes, Ray Ban sunglasses and a silk tie, leaned out the window and asked the shepherd… “If I tell you exactly how many sheep you have in your flock, will you give me one?” The shepherd looked at the man, obviously a yuppie, then looked at his peacefully grazing flock and calmly answered “sure”. The man parked his car, whipped out his laptop and connected it to a mobile phone, then he surfed to a NASA page on the internet where he called up a GPS satellite navigation system, scanned the area, and then opened up a database and an Excel spreadsheet with complex formulas. He sent an email and, after a few minutes, received a response. Finally, he prints out a 130-page report, then turns to the shepherd and says, “You have exactly 1586 sheep. “That is correct; take one of the sheep.” said the shepherd. He watches the young man select one of the animals and bundle it into his car. Then the shepherd says: “If I can tell you exactly what your business is, will you give me back my animal?”, “OK, why not.” answered the man.” Clearly, you are a consultant.” said the shepherd. “That’s correct.” Says the man, “but how did you guess that?” “No guessing required.” Answers the shepherd. “You turned up here although nobody called you. You want to get paid for an answer I already knew, to a question I never asked, and you don’t know crap about my business. Now give me back my dog.”

  1. “BORE, n. A person who talks when you wish him to listen.”

“I’m bored’ is a useless thing to say. I mean, you live in a great, big, vast world that you’ve seen none percent of. Even the inside of your own mind is endless; it goes on forever, inwardly, do you understand? The fact that you’re alive is amazing, so you don’t get to say ‘I’m bored.”  Louis C.K.


The Devil’s Dictionary http://xroads.virginia.edu/~Hyper/Bierce/bierce.html#L

The Devil’s Financial Dictionary By Jason Zweig  https://www.amazon.com/Devils-Financial-Dictionary-Jason-Zweig/dp/1610396995

Tech version: http://www.theverge.com/a/new-devils-dictionary

How to Make Decisions like Ray Dalio

What is most interesting to me about Ray Dalio is his decision-making process. This blog post is limited to a discussion of that process and not Bridgewater’s philosophy generally. If you are interested in understanding Bridgewater and Dalio more broadly, Dalio has a book coming out this fall which expands on his widely circulated “Principles” document.  I have written a more general blog post about Dalio on this blog, which you can find a link to in the Notes to this post.

Anyone who has read and understood the books and essays of Michael Mauboussin knows that people who have a sound decision-making process have better outcomes in life (not just in investing). Dalio’s view tracks Mauboussin’s view: “I think that every single day there are many decisions that people make and they all have consequences. And your life essentially depends on the cumulative quality of the decisions you make.” Having said that about the importance of making wise decisions in all aspects of life, thinking about how Dalio makes investment decisions is a particularly effective way of understanding his process. These quotations from Dalio set the table for a discussion of his decision-making process:

“You have to be an independent thinker in markets to be successful because the consensus is built into the price. You have to have a view that’s different from the consensus.” 

“To win at stocks or entrepreneurship, you must bet against the consensus and be right.”

Andy Rachleff makes the same point as Dalio is saying in this way: “Investment can be explained with a 2×2 matrix. On one axis you can be right or wrong. And on the other axis you can be consensus or non-consensus. Now obviously if you’re wrong you don’t make money. The only way as an investor and as an entrepreneur to make outsized returns is by being right and non-consensus.”


Another adherent to this idea is Howard Marks who has said: “To achieve superior investment results, your insight into value has to be superior. Thus you must learn things others don’t, see things differently or do a better job of analyzing them – ideally all three.” Being genuinely contrarian means the investor is going to be uncomfortable sometimes. Some people are good at being uncomfortable, and some are not.

Dalio believes:  

“Most other professions you can build on existing knowledge. You don’t have to have a point of view. If you’re a doctor and somebody breaks a leg or whatever, you can repair that leg. It’s not zero-sum, in the sense that you have to be smarter than the next person or different from the consensus. Now in order to be different from the consensus, there’s a high risk you’re going to be wrong.”

“Find people of alternative points of view and have quality conversations back and forth. Not to let them think for me, not for me to follow their point of view, but for me to understand the different perspectives. Because it increases my probability of being right, and it reduces my probability of being wrong.”

“When you have a view that’s different from the consensus, you’re gonna be wrong a certain number of times.  It teaches you humility.  The most important thing is to have humility and to think about ‘how do I get the best decision?’ It doesn’t have to come from me, I just want to be right.”

“Decision-making should be two steps. The first step is taking in information, particularly if there is disagreement, to understand that disagreement and then to make a decision. You have your right to make a decision. But it is so stupid not to take the time to take in and explore disagreement that might help prevent yourself from being wrong.”

The desire to explore disagreement is the foundation of Dalio’s drive to create “radical transparency”? Dalio describes this concept as follows:

“I want an idea meritocracy.  I want independent thinkers who are going to disagree.  The most important thing I want is meaningful work and meaningful relationships and the way to get that is through radical transparency.”

“Meaningful work is being on a mission that you’re excited about and that you can get your head into. And in meaningful relationships you can be totally transparent with each other, letting each other know what your weaknesses are.”

As context, what Dalio is setting out to do as an investor is extraordinarily hard. To say that a tiny number of people outperform the markets by making macro bets is a radical understatement. A handful of people have been able to do this successfully over many years at scale. Dalio has discovered a source of alpha (outperforming a benchmark) through a process that results in better decisions.

Here is my short “boil the ocean” description of his decision making process: Dalio starts with a rational analysis of the information he has and from that he forms a hypothesis. He then exposes that hypothesis to thoughtful people with alternative points of view and methods of analysis who may disagree with him and then he wants a radically transparent “back and forth” discussion. As part of that process he wants to deeply understand the reasoning of any thoughtful opposing views. Only after he has understood these alternative points of view does Dalio believe he is in a position to reject or accept the alternative ideas and make a decision. Dalio’s approach is quite similar to Charlie Munger’s approach: “I never allow myself to have an opinion on anything that I don’t know the other side’s argument better than they do. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.”

Why would Dalio join Twitter this week? Well, if you do use Twittter properly you can get exposed to real time views of smart people who think differently and who may have opposing views. He seems to understand a key point about Twitter’s value when he tweeted this past week: “Look forward to learning from my mistakes in a whole new way.” Bob Lefsetz explains why Twitter is so unique:



Many people treat Twitter as a broadcast medium which is a shame since the value of interactive discussion is so much higher. Many people also turn their Twitter feed into a echo chamber, which is a lost opportunity. Jason Zweig has a great column this week where is describes why “Investors have a hard time looking the truth square in the face” and the creation of echo chambers of all kinds makes the problem worse.

Dalio and Munger share other approaches to decision-making. For example, Munger, who describes his process as follows: “I use a kind of two-track analysis. First, what are the factors that really govern the interests involved, rationally considered? The first track is rationality-the way you’d work out a bridge problem: by evaluating the real interests, the real probabilities and so forth. Second, [I work to eliminate] influences where the brain at a subconscious level is automatically doing these things-which by and large are useful, but which often malfunctions.” Munger and Buffett also have a third step in their decision-making process that is similar to Dalio: expose their ideas to the best minds they can find. In Buffett’s case that mind is almost always Charlie Munger. Buffett calls Munger the “Abominable No Man.” Buffett exposing an investing hypothesis to Munger is like tempering steel    if an investing hypothesis doesn’t break after being exposed to Munger it is more likelky to be sound.

Having a diverse “posse” of experienced people that you trust look at a potential investment is wise if you want to avoid making too many mistakes. Philip Fisher, an investor who Munger and many other investors learned a lot from, maintained a “scuttlebutt” network of people who he would call for advice or expertise, Munger has said: “Even Einstein didn’t work in isolation. But he never went to large conferences. Any human being needs conversational colleagues.” Buffett once gave a huge compliment to Munger’s value as a person who can stress test his ideas when he said: “I try to look out 10 or 20 years when making an acquisition, but sometimes my eyesight has been poor. Charlie’s has been better; he voted ‘no’ more than ‘present’ on several of my errant purchases.”

To review what I have said in this post so far, the decision making process that Dalio, Buffett and Munger use is:

(1) make the most rational decisions you can;

(2) look for psychological bias that may have interfered with making a rational decision; and

(3) expose your hypothesis to very smart people who have a thoughtful contrary view and deeply understand their position.

On this last point Daniel Kahneman believes: “To better avoid errors, you should talk to people who disagree with you and you should talk to people who are not in the same emotional situation you are.”

Dalio believes that the more a person repeats this process over the years, the more they learn. What does this sound like to you? It is essentially what Munger calls “Worldly Wisdom.” Dalio sounds very much like Munger here:

“What I’ve discovered in that process is that I was learning so much. So just imagine what a fantastic path to think.” “Let me go after the person who has got the opposite point of view, who is really smart, and let me have quality conversations, quality disagreement.” “I get clear feedback. The goal is: don’t be too wrong. Be more right than wrong. So in that process I can take personal accountability. If I don’t learn personal accountability, if I don’t learn, then I’m going to pay a terrible price. So that process itself lent itself to this kind of very open-minded decision. Also the making mistakes, and the loving the mistakes.”

“There’s an art to this process of seeking out thoughtful disagreement. People who are successful at it realize that there is always some probability they might be wrong and that it’s worth the effort to consider what others are saying — not simply the others’ conclusions, but the reasoning behind them — to be assured that they aren’t making a mistake themselves. They approach disagreement with curiosity, not antagonism, and are what I call ‘open-minded and assertive at the same time.’ This means that they possess the ability to calmly take in what other people are thinking rather than block it out, and to clearly lay out the reasons why they haven’t reached the same conclusion. They are able to listen carefully and objectively to the reasoning behind differing opinions. When most people hear me describe this approach, they typically say, ‘No problem, I’m open-minded!’ But what they really mean is that they’re open to being wrong. True open-mindedness is an entirely different mind-set. It is a process of being intensely worried about being wrong and asking questions instead of defending a position. It demands that you get over your ego-driven desire to have whatever answer you happen to have in your head be right. Instead, you need to actively question all of your opinions and seek out the reasoning behind alternative points of view.”

Dalio’s famous principles document provide a guide to decision making at Bridgewater. Many of these principles you have seen other investors say on this blog. For example:

“190) Recognize the Power of Knowing How to Deal with Not Knowing

191) Recognize that your goal is to come up with the best answer, that the probability of your having it is small, and that even if you have it, you can’t be confident that you do have it unless you have other believable people test you.

192) Understand that the ability to deal with not knowing is far more powerful than knowing a) Embrace the power of asking: ‘What don’t I know, and what should I do about it?’ b) Finding the path to success is at least as dependent on coming up with the right questions as coming up with answers.

193) Remember that your goal is to find the best answer, not to give the best one you have.

194) While everyone has the right to have questions and theories, only believable people have the right to have opinions

195) Constantly worry about what you are missing. a) Successful people ask for the criticism of others and consider its merit. b) Triangulate your view.

196) Make All Decisions Logically, as Expected Value Calculations

197) Considering both the probabilities and the payoffs of the consequences, make sure that the probability of the unacceptable (i.e., the risk of ruin) is nil. (a) The cost of a bad decision is equal to or greater than the reward of a good decision, so knowing what you don’t know is at least as valuable as knowing. (b) Recognize opportunities where there isn’t much to lose and a lot to gain, even if the probability of the gain happening is low. (c) Understand how valuable it is to raise the probability that your decision will be right by accurately assessing the probability of your being right. (d) Don’t bet too much on anything. Make 15 or more good, uncorrelated bets.”

What typically gets in the way of the process like Dalio wants to create? Ego and organizational politics.

A. The ego of the decision maker is so often the source of a problem or mistake. Dalio says that it is emotionally hard to be radically transparent.  Warren Buffett writes: “It’s ego. It’s greed. It’s envy. It’s fear. It’s mindless imitation of other people. I mean, there are a variety of factors that cause that horsepower of the mind to get diminished dramatically before the output turns out. And I would say if Charlie and I have any advantage it’s not because we’re so smart, it is because we’re rational and we very seldom let extraneous factors interfere with our thoughts. We don’t let other people’s opinion interfere with it… we try to get fearful when others are greedy. We try to get greedy when others are fearful. We try to avoid any kind of imitation of other people’s behavior. And those are the factors that cause smart people to get bad results.” What Buffett describes is an example of what Charlie Munger calls inversion. Instead of just trying to be smart, it is wise to focus on not being stupid. Dalio believes:

“People are so attached to being right, and yet the tragedy is it could be so easy to find out how you’re wrong. If you just said to yourself, “I’m not sure that I’m right, and let me go find people who have alternative point of views and let me have quality conversations.” Not to pay attention to their conclusions, but to the thought process. So thoughtful discussion, worrying about being wrong but not to the sense of being paralyzed. Or moving forward, but in the sense of trying to create discovery, to have an exchange. To go after the person who has the most different point of view, who is the most thoughtful, and then have a conversation to see their point of view. Whether a person could be both open-minded and assertive at the same time, that creates a discovery process. It creates a fabulous learning. That process itself reduces the probability of being wrong and produces a great deal of learning. People are so hung up on being right. Starting their discussion and deriving some sort of satisfaction if, at the end of the discussion, they were where they began the discussion. That doesn’t make any sense, because there’s not going to be any learning. So ego plays an important role in that. The people that feel like, ‘I’m good. I’ve got it,’ won’t learn. If you’ve got it, you won’t learn. So you have to get rid of this ego barrier, ‘I’ve got it’ thing.”

“You start to learn how people see things differently. And rather than just seeing how you see it, you go above that. You’re seeing that everybody is seeing things differently. It changes how you see things because it starts to make you think, how do I know I’m not the wrong one? You start to think, how do I collectively see? And it’s like being in a different color range. All of the sudden you see the full spectrum. When you start to realize that people are actually seeing in those [different] ways — that it’s a valid way of seeing, and that I need you and you need me — it gives you the evidence base that it’s okay to be different. The most important thing is to have humility, and to think about, how do I get the best decision? It doesn’t have to come from me. I just want it to be right, right? If comes from other people, that’s good. The greatest tragedy of mankind is people holding on to wrong opinions that could so easily be rectified and that are doing them harm because they’re making wrong decisions.”

B. Organizational politics. One advantage that Buffett and Munger have is that in many cases the “radically transparent” discussion is just between the two of them. Both Buffett and Munger have said that they sometimes disagree but have never had “an argument” that was hostile. They have also decided to focus on investing decisions that involve forecasts about microeconomics. In contrast, Dalio is engaged in macro investing and his supporting organization is far larger. Reuters describes what must be managed at Bridgewater as follows:

“Bridgewater manages about $160 billion, according to its website, and is known for a unique culture of ‘radical truth and radical transparency’ whereby intellectual conflict is encouraged to promote a meritocracy of ideas, avoiding traditional office politics. The culture is not for everyone. The firm is known for relatively high turnover among its roughly 1,700-person staff. An estimated 25 percent depart during the first 18 months of employment.”

The challenges associated with maintaining a culture like Bridgewater which is willing to incur the overhead of continuously providing feedback and utilizing it in decision-making in an idea meritocracy are significant. The number of connections between employees increases with the square of the number of involved employees, which has caused Dalio to come up with some unusual approaches to maintaining radical transparency like videotaping and making available to anyone almost all meetings and the use of Bridgewater designed baseball cards. It is precisely because what Dalio is doing at Bridgewater is so hard that Bridgewater’s alpha has been persistent. If doing what Bridgewater does was easy, the alpha would disappear. Being different is a source of competitive advantage. If you want different results you must act in a different way.

To see how Dalio tries to combat dysfunctional corporate politics at Bridgewater it is useful to examine how he describes his principles:

“Never say anything about a person you wouldn’t say to him directly. If you do, you’re a slimy weasel. Badmouthing people behind their backs shows a serious lack of integrity. It doesn’t yield any beneficial change and it subverts both the people you are bad mouthing and the environment as a whole. Next to being dishonest, it is the worst thing you can do at Bridgewater. Criticism is both welcomed and encouraged at Bridgewater, so there is no good reason to talk behind people’s backs. You need to follow this policy to an extreme degree to be in harmony with our culture. For example, managers should not talk about people who work for them without those people in the room.” “So every meeting is taped and made available for everybody in the company to look at. And all we have are conversations of, ‘What makes sense?” Everybody has the right to make sense of things. Now in that environment I get to see how differently people think. I realize how radically different people think.”  “This approach comes to life at Bridgewater in our weekly research meetings, in which our experts on various areas openly disagree with one another and explore the pros and cons of alternative views. This is the fastest way to get a good education and enhance decision-making. When everyone agrees and their reasoning makes sense to me, I’m usually in good shape to make a decision. When people continue to disagree and I can’t make sense of their reasoning, I know I need to ask more probing questions or get more triangulation from other experts before deciding. I want to emphasize that following this process doesn’t mean blindly accepting the conclusions of others or adopting rule by referendum. Our CIOs are ultimately responsible for our investment decision-making. But we all make better decisions by maintaining an independent view and the conflicting possibilities in our minds simultaneously, and then trying to resolve the differences. We’re always in the place of holding an opinion and simultaneously stress-testing the hell out of it. Operating this way just seems like common sense to me. After all, when two people disagree, logic demands that one of them must be wrong. Why wouldn’t you want to make sure that that person isn’t you?”

This sort of total honesty and transparency is not a comfortable environment for many people, but it is for enough talented people that Bridgewater has been able to assemble its team and compile its remarkable investing record. If you want to dig into radical transparency and issues like how ego and emotions can get in the way of Dalio’s approach to making decisions, I suggest you watch “The Culture Principle” video linked second in the Notes below.


Dalio Essay http://www.institutionalinvestor.com/blogarticle/3433519/bridgewaters-ray-dalio-explains-the-power-of-not-knowing.html#.WPcD9YWcFNs

The Culture Principle https://www.youtube.com/watch?v=h2KHec3KNyQ

Dalio Interview:  http://prodloadbalancer-1055872027.us-east-1.elb.amazonaws.com/autodoc/page/dal1int-1

Bridgewater Principles:  https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsdGRvbWFpbnxlYm9va3Nkb3dubG9hZG5vdzIwMTZ8Z3g6MjY3NGU2Njk5N2QxNjViMg  and https://www.bridgewater.com/#principles-culture

New Yorker Profile: http://www.newyorker.com/magazine/2011/07/25/mastering-the-machine

A Dozen Things Essay by me about Dalio: https://25iq.com/2013/10/12/a-dozen-things-ive-learned-from-ray-dalio-about-investing/

Radical Transparency Essay: https://www.forbes.com/sites/eriklarson/2017/04/04/decision-making-guru-ray-dalio-radical-transparency-buddha/2/#6eef6f63112c

The Rise of the Freemium Business Model


Freemium describes a business model in which a business gives one product away for free or at a subsidized price and then either: (1) sells another profitable product to this user base; or (2) sells access to that user base to third parties (e.g., advertisers). Three versions of the Freemium approach are:

  1. Available Forever- No premium versions are made available. Google and Facebook are examples that monetize with advertising.
  2. Premium Freemium: Users pay only for premium versions (e.g., more powerful features or greater use rights). Only the free baseline version is “available forever.” LinkedIn and TurboTax are an examples.
  3. Limited Freemium: The free version is made available but is limited by factors like time and/or capacity. One example would be a 30 day trial with no “available forever” baseline version.

The freemium business model is ancient. A bar giving away salty snacks to sell more  alcohol is nearly as old as the still that created the liquor. The practice of offering tapas in Spain is just one relatively modern example. Newspapers being used to sell political views is another example:

“Gerald J. Baldasty’s book, The Commercialization of News in the Nineteenth Century, makes a case clear as spring water that hard news has almost never been a mass commercial enterprise. The American newspapers of the 1820s and early 1830s were creatures of political parties, edited by zealots. Essentially propaganda sheets, these newspapers were “devoted to winning elections …Many subscribers simply did not pay for their newspapers,” Baldasty wrote.  “In 1832, one North Carolina editor estimated that only 10 percent of his 600 subscribers had paid for the paper.”

Many businesses have offered free services (free month of HBO) or free trials (magazines). The Venture capitalist Tomasz Tunguz of RedPoint has written about why the freemium business model works so well:

“At its core, freemium is a novel marketing tactic that entices new users and ultimately potential customers to try a product and educate themselves about its benefits on their own. By shifting the education workload from a sales team to the customer, the cost of sales can decrease dramatically… freemium startups leverage usage data to improve their product. The large amount of users using the product enables A/B testing with statistical significance, a non-trivial strategic advantage. Marketing teams can sift through the data to understand market segmentation and funnel efficiency, and product management can parse the data to improve the on-boarding experience. Third, freemium startups gather information about their customer base to prioritize their sales efforts.”

The cost of educating the potential customer about the benefits of the product can be dramatically lower once a potential customer has used the product in the free setting. The need for advertising to create awareness is lower and any expenses associated with a paid salesperson or sales support engineer patiently explaining the product to a potential customer has been replaced by self-education. Freemium also leverages other human tendencies like reciprocity and inertia, which further lower the cost of sale. John Vrionis of Lightspeed Venture Partners describes the less costly and more effective freemium sales process:

“Evangelizing a new religion is hard work, and more importantly it is expensive. But that’s essentially what selling proprietary software is like. Conversely, selling bibles to a group of believers is a lot easier… Sales people engage an account when they know that the prospect is well down the path of adoption and belief.”

In some settings the salesperson can be eliminated completely as the customers “upsell” themselves with self-service capabilities of the company web site.

As Tungus and Vrionis note, the essence of the Freemium model is to reduce the price of acquiring a customer. My post “Why is Customer Acquisition Cost (CAC) like a Belly Button?” is an introduction to the topic of CAC. Everyone with a business has CAC.

To illustrate, even comedians must incur costs to acquire customers. As an example, here a famous few sentences from a monologue form the comedian Louis C.K:

“Everything is amazing right now and nobody’s happy. In my lifetime the changes in the world have been incredible. When I was a kid we had a rotary phone. We had a phone you had to stand next to and you had to dial it. And then when, if you wanted money you had to go in the bank for when it was open, for like three hours.”

Those four sentences solidified Louis C.K.’s reputation as an A-List comic. The comedian’s monetization was indirect as is often the case today:

“Comedians today are more likely to gain fame via a YouTube skit or a bit that plays well on a talk show. (Louis C.K.’s most famous monologue, “Everything’s amazing and nobody’s happy,” happened in a sit-down interview with Conan O’Brien).”

Since Louis C.K. is a member of the Screen Actors Guild he would have received at least the union minimum wage to be on O’Brien’s show, but that is a tiny fraction of the value that monologue created for his career. Louis C.K. essentially gave away that monologue for free. In this case one activity (the Conan O’Brien appearance) is being used as a substitute for customer acquisition cost (CAC) for other products like his concerts. This cross promotional approach is not new. Especially for comedians. Not too long ago they generated most of their profit from albums (promoted on talk shows) and concerts (Johnny Carson used to tell people their dates).

Are other comedians using freemium like Louis C.K.? Yep. But the loss leader is not always a zero revenue gig, just lower revenue.

“Comics [have] realized how a constant presence on Netflix, as opposed to sporadic broadcasts on linear television, could help build a larger loyal audience. For most comedians, specials are a means to boosting their key revenue source: regular ticket sales on the road. TV specials have always translated into additional fans showing up on tour stops, but the lift from a Netflix special exceeded what a lot of comics were seeing from regular TV. “The amount of time it took to see the bump was drastically reduced from years to … six or seven months after an artist’s special is on Netflix,” says Volk-Weiss. “Their touring business goes up by hundreds of [percent].”

Wait!” You are probably saying, “People have done free promotions forever.” That’s true, but with the digitalization and networking of the world this freemium phenomenon has been put on steroids. Ben Thompson succinctly describes one root cause of why the Freemium phenomenon is on the rise as a customer acquisition technique as the world become more digital and networked:

“The defining characteristic of anything digital is its zero marginal cost. Take apps for example: What makes the software market so fascinating from an economic perspective is that the marginal cost of software is $0. After all, software is simply bits on a drive, replicated at the blink of an eye. Again, it doesn’t matter how much effort was needed to create said software; that’s a sunk cost. All that matters is how much it costs to make one more copy – $0. The implication for apps is clear: any undifferentiated software product, such as your garden variety app, will inevitably be free. This is why the market for paid apps has largely evaporated. Over time substitutes have entered the market at ever lower prices, ultimately landing at their marginal cost of production – $0.”

In addition to being reproducible and distributable at virtually zero marginal cost, digital goods typically do not have the two qualities described here by Brad DeLong:

“Excludability: the ability of sellers to force consumers to become buyers, and thus to pay for whatever goods and services they use.

Rivalry: a structure of costs in which two cannot partake as cheaply as one, in which producing enough for two million people to use will cost at least twice as many of society’s resources as producing enough for one million people to use.”

If I make a digital copy of your digital music, you still have your music (the music is non-rival). If I steal your phone you will no longer have a phone (a phone is rival). So-called “public goods” are non-rival and non-excludable. A lighthouse is a public good and in many settings so is software. If a business can’t charge customers a fee directly for a good or service since it is a public good giving it away is “sleeves off its vest.” In other words, the real opportunity cost of the sales incentive is zero if the business can’t charge a fee for it anyway.

One confusing element of a freemium business model is the accounting involved. If giving away goods or services for free or with a subsidy is not a marketing expense, what exactly is it? Marketing costs are typically shown below the gross margin line on an income statement. But the cost of freemium offerings can be considered part of costs of goods sold or COGs. Different companies treat freemium costs in different ways. Some companies even split the difference: the cost of non-converted non-paying customers is a marketing expense and the cost of serving paying customers is COGS. In any event, giving away free services is an expense however you look at it.

Small startups with little cash on hand or that desire not to dilute their ownership too much by raising more cash have found freemium to be particularly attractive. If they know how to write software they can use the free service to avoid spending cash on customer acquisition. As an added benefit, customers acquired though freemium tend to value the product more. They churn less from the service and tend to have better credit. Of course freemium can be taken too far, especially if there isn’t a profitable complementary good that can be paired with the service. With internet scale services, while the incremental cost of a new customer/user is not zero (as per Ben Thompson’s description of digital goods) it is effectively zero as there is so little incremental cost. An exception would be highly resource intensive services such as live streaming, email/file storage, or translation all of which use significant bandwidth, storage, or compute per incremental use.

Bill Gurley describes an increasingly important phenomenon facing every business today: “If a disruptive competitor can offer a product or service similar to yours for ‘free’ and if they can make enough money to keep the lights on, then you likely have a problem.” Every businesses today must be prepared for competitors to give away what they sell as an incentive for customers to buy something else. That fact thatmany of the free services are digital and have close to zero marginal costs has caused the freemium strategy to spread like wildfire. The implications of the freemium business model are massive since businesses now face competition from companies that they never previously thought of a competitors. Fred Wilson believes: “when network effects matter, when your users are creating the content and the value, free is the business model of choice.” If the network effects benefits of size are large getting big fast is hard given customers acquisition cost. And the best way to lower customer’s acquisition costs is often free. Making the approach even more attractive is the fact that even free users add to network effects since they are using the systems and its formats.

Using a freemium approach can be tricky in an enterprise setting. Version One ventures points out that freemium can create problems and is not a panacea:

“Offering an app/service for free can send the wrong message. Here, free can be equated with low quality. Free isn’t necessarily sustainable with B2B. Acquiring business users may prove too costly, forcing start-ups to raise incredible amounts of money to finance aggressive sales and marketing efforts for a free app. In the enterprise, freemium models generally work in two situations: (1) You target a large enough user base and (2) The product becomes more valuable over time.”

Freemium works best when there are millions of potential customers since the conversion rate will not be high. Best practices include:

  1. Avoid selecting “free” items that have significant variable COGs. Select software-based free services that have almost zero marginal cost works better.
  2. The best free services have network effects.
  3. Make sure that the item you select as free side of the marketplace has complementary services that might be sold at a profit. Free checking at a bank is good example of free service that makes upselling natural (many types of loans).
  4. The best forms of Freemium make it natural for the users to register revealing their personal data and set up a credit card on file.
  5. The best complementary products are services that people are accustomed to paying real money for (convincing people to spend money in a new category is not easy),
  6. The best free services have low churn since they are sticky)

What sort of conversion rates are typical in a freemium model? One estimate from Totango is:

“For a B2B SaaS company with free trial, I assume the following ball park figures:

3%-5% – average and means good business operations
8% and above – excellent conversion rates
below 3% – below average.”

Nothing creates a base from which to try to up-sell users like a free service.  There is no question that a price of zero is magical for humans. Work by Dan Ariely proves this point:

“In one study we offered students a Lindt Truffle for 26 cents and a Hershey’s Kiss for 1 cent and observed the buying behavior: 40 percent went with the truffle and 40 percent with the Kiss. When we dropped the price of both chocolates by just 1 cent, we observed that suddenly 90 percent of participants opted for the free Kiss, even though the relative price between the two was the same. We concluded that FREE! is indeed a very powerful force.”

Ariely concludes: “‘Free’ is kind of an incredibly tempting human hot button. And sometimes it’s great and sometimes it gets us into trouble.”   

The freemium approach is now scalable globally as never before. The implications of this shift are huge and still being sorted out.

P.s., How much is being given away by producers in consumer settings as a result of the freemium phenomenon? Since free products have no price they are not easy to measure, One indication that the number is large is the fact that 98% of App Store revenue is coming from freemium apps. Services like mobile games and Craigslist have free elements.

  • A Deloitte Report summarizes some of the research in consumer settings:

“Researchers at the University of Michigan found that they saved 15 minutes by using the internet compared to the university library to answer a list of specific questions. Assigning a monetary value to these time savings Google’s Chief Economist, Hal Varian, estimated that the search feature of the internet generates a consumer surplus in the US of $65-130 billion a year. This is likely to significantly underestimate the true level of saving because in this experiment the internet was compared with a university library – an asset that few consumers can access. Another approach is to estimate the time people spend on the internet. The reasoning runs that if I choose to spend an evening searching the web it demonstrates that I prefer this activity to all others available to me. Using this approach Erik Brynjolfsson and Joo Hee Oh at MIT estimated America’s consumer surplus from the internet at $564bn in 2011. Inclusion of this surplus in America’s GDP numbers would have boosted annual growth by a sizeable 0.4 percentage points – equivalent to a 15% uplift in trend growth.  The nature of the internet and the way we interact with it makes estimating the consumer surplus from it incredibly difficult. Crowdsourced websites such as Twitter, Wikipedia, TripAdvisor or the review section of Amazon are particularly challenging. How does one measure the addition to the consumer surplus from our receiving advice, ideas and information?”

These estimates do not include the value of open source and other public goods for businesses such as free cloud compute and storage for commercial customers. For example, every cloud company now has a free tier. Azure also has free credit for new customers and a free service trier.  Amazon has both an always free trier and a first-12-months-free offer. Google also has a free to use tier for its cloud services. In 2015 GetApp, a company that tracks over 3,000 business apps, reported that 22% of the total have adopted a freemium model. Business like DropBox, Slack, MailChimp, SoundCloud, EverNote, ZoHo, SurveyMonkey, Skype, HootSuite, Moz, Weebly, Salesforce, Optimizely, and Box all use a freemium approach. Open source examples include Linux, Git, MySQL, Node.js, Docker, Hadoop, Elasticsearch,  Spark,  MongoDB, Selenium, NPM, Redis,  Tomcat, Jenkins, Vagrant, Postgres, Gradle, Nginx, Ansible,  Kafka, GitLab, and Chef.

Open source software has enabled the creation of many freemium business models. By combining software that is given away as part of an open source community with related proprietary services that are not given away, a new business model is created. The related profitable and proprietary services must “complement” the free service like mustard complements a hot dog for the model to work well. Many entrepreneurs and investors have realized that the best path in creating a new business is to invent an open source project that is widely contributed to and then build a service around it after hiring all the people who worked on it. Businesses that have been built around open source, like Databricks, Mesosphere, and Docker, exemplify this trend.


Louis C.K. https://www.youtube.com/watch?v=q8LaT5Iiwo4

Ben Thompson https://stratechery.com/2014/cost-bitcoin/

Deloitte: http://blogs.deloitte.co.uk/mondaybriefing/2015/09/weve-never-had-it-so-good.html

DeLong  http://delong.typepad.com/hoisted_from_the_archives/2007/11/j-bradford-delo.html

John Vrionis: http://venturebeat.com/2015/12/06/its-actually-open-source-software-thats-eating-the-world/

Jack Shafer: News never made money, and is unlikely to.  http://blogs.reuters.com/jackshafer/2013/08/15/news-never-made-money-and-is-unlikely-to/

Tomasz Tunguz http://tomtunguz.com/when-to-go-freemium/

Version One: http://versionone.vc/freefreemium-work-enterprise/#ixzz4eNwf7zE0

Fred Wilson: http://avc.com/2012/07/in-defense-of-free/